Government’s search for an alternative to PFI takes another twist with growth bonds

Labour’s PFI and PPP schemes turned out badly in so many ways, it is easy to forget quite why they were so popular to begin with, both with politicians very much of the central government public spending school (e.g. John Prescott) and also with senior public sector managers wanting to get funding for their areas (e.g. at Transport for London). The off-balance sheet part of them meant the government, within its then economic approach, was willing to spend more on infrastructure investment than it otherwise would have. Moreover, by involving long-term legally binding contracts they provided a degree of security and planning which transport infrastructure in particular, with huge budget changes year by year, had greviously lacked.

All the flaws that transpired mean there are now precious few people calling for more PFI/PPP. But the problems they originally looked to fix – generating more investment and more certainty of funding – are still as relevant, in fact more so given the state of the economy.

The government has already looked to tap funds from the pensions sector, but our infrastructure and economic needs go beyond that. Liberal Democrats should therefore not be put off by the latest idea coming from not only the Treasury but George Osborne no less:

The Chancellor has told Treasury officials to find ways to persuade savers to transfer billions of pounds held in bank accounts, building societies and investment funds to new government “growth bonds”.

The money would be invested in infrastructure projects such as toll roads, green energy and housebuilding…

Ministers are also looking at how they can use the strength of the Government to underwrite the risk to small investors. They are considering proposals, similar to those recently announced for housebuilders, for the Government to underwrite a given percentage of any potential losses by the projects. This would mean that the Government took the “first” risk with the schemes – losing its money before any investors…

A senior government source told The Independent: “While a lot of families are struggling and have no disposable income, there are others who are quite cash rich but have nowhere secure to put their money where they can be guaranteed a decent return. Because interest rates are as low as they are, there is the potential to tap into this money and get it invested in infrastructure which will have a dramatic effect on Britain’s long-term growth.”

That is a policy that has a lot to commend it, though it should be combined with recognising that those who “are quite cash rich” get significant tax breaks in the form of unlimited ISA allowances.

The ISA allowances tax breaks have an annual cap – but you can make full use of the caps each year, accumulating – if you have that money – a huge amount of tax-free savings over time.

A fairer course would to be cap the maximum ISA tax break at £15,000 per person – remembering that with over half the population having less than £1,000 in savings, those with more than £15,000 in saving in addition to any pension savings are very well off compared to the bulk of the population.

This would free up around an extra £1bn per year to further boost infrastructure investment and jobs, and if at the margins it encourages some of the most well off people to spend rather than save, all well and good – the economy could do with that extra spending.

That would help turn Nick Clegg’s talk of a new economic tone and a greater emphasis on growth into reality.

* Mark Pack is a member of the Federal Board and editor of Liberal Democrat Newswire.

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7 Comments

  • jenny barnes 7th Jun '12 - 9:31am

    This is just bonkers. The Government can borrow money at historically low rates, via the issuance of gilt edged bonds, and invest the result in whatever infrastructure it thinks makes sense. Inventing some fabulous wheeze that’s effectively more off balance sheet government debt that pays a higher interest rate is PFI mark 2. Austerity isn’t working; what’s needed is investment in infrastructure. I’d build social housing, nuclear power stations and long haul HVDC lines to start with.
    This scheme seems to me to be a way of pretending that the government isn’t borrowing, when it actually is.
    The economics of a country and the economics of a household are not the same.

  • Keith Browning 7th Jun '12 - 12:40pm

    All these government suggestions seem to be the wrong way round.

    Why don’t governments give bail-out money and financial assistance directly to the people, and not the banks. Each individual then uses the money to pay off their debt to the bank. The people then clear their debt and start again – the banks still get the money, but from its customers not the government. The bank insolvency problem is solved and so is that of the customer. Now that would really kick start the economy.

    Seems obvious – so where is the flaw.

  • I totally agree that UK investors need to invest more at home rather than Pacific Rim and other areas. How is this bond idea different from National Savings, which many people are proud to invest in? Maybe it is the big boys in the City, who need persuading?

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