WEEKLY COMMENT 4-12-2014
By Barry Edwards
The Autumn Statement
The main new change in the Autumn Statement was the stamp duty rates being phased in as you move up the scale. Otherwise there was nothing very special to get anyone excited about and any dramatic proposals will be left for the budget next year. There are many small sums being allocated for research and development with various SME financing improvements. If you wish to have a look at the official document, click on the link below which highlights all the changes in green.
Some interesting proposals are to allow institutions to invest in peer-to-peer lending and to make losses deductible against tax payable for individuals. The actual maximum allowances are not stated but that is a big step forward for this evolving lending method. If you do not understand what peer-to-peer means it is simply individuals lending to companies, sometimes in very small amounts such as £100 or less and in some cases £10. The British Business Bank is getting another £400 million and the SME guarantee scheme has been increased by £500 million. This extra money does help to improve access to finance for SME’s but it is really just tinkering around the edges of the problem.
With such an enormous budget deficit to eliminate, it is hardly surprising that most of the comment is about that specific problem. Until that is reduced substantially there is little room for any manoeuvring within government finances and therefore one can only expect structural changes to make the headlines. Everything that has been announced is along those lines and most of those changes have been well received. It will be some time before any government can make promises that are fundable making it difficult to forecast what electioneering temptation can be dreamed up by the coalition for the budget next year prior to the election in May.
In my view, there is only one plan that will really make a difference and that is something similar to the infrastructure plan announced by the president of the European Commission which we discussed last week. The comments about that have been quite severe from many quarters but I believe the critics are missing the point of the intention behind the plan. Although it concentrates on infrastructure only, most critics believe that national governments should borrow the money instead of using this innovative guarantee method that has been proposed. That seems to negate the whole point of the plan and is something most governments have said they will not do and the EU will not condone anyway.
In the UK, devising a plan that will do something similar and include commercial projects would make a big difference to the economy over the next five years. Its main advantage is that there is no cost to government and it generates tax revenue from the start when funding is arranged. The next few paragraphs will explain how that can be achieved.
The Bank of England (BofE) own £375 billion of government bonds, they receive interest on these which it returns it to the Treasury every year. The government is the sole shareholder and the BofE are the beneficial owners and have full control over the asset. With government permission, these bonds could be used as collateral for guarantees for projects of all kinds including infrastructure on a one for one basis. That means the bonds used as collateral would be the amount of the guarantees allowed to be issued, in other words no gearing. For the sake of convenience to calculate, say £100 billion of bonds are used; the guarantees would remain in force for a maximum of 5 years
The terms of issuing the guarantees would be a 2% fee per annum while it is being used and where it is used for commercial projects a shareholding would be taken by the BofE. This would increase each year the guarantee is in force to encourage refinancing to take place as soon as the project is completed. It is proposed that the shareholdings the BofE acquires for guaranteeing commercial projects would be held in a UK sovereign wealth fund for the nation. A project management organisation would be set up, similar to the EU commission proposal, which would act as controller for all the projects on behalf of the BofE. You can see much more detail on this proposal in the Economic Growth Plan in the right hand column of this page.
The purpose of the guarantees is to make sure the projects happen and are in force while the construction phase is completed. It is rare projects do not go according to plan these days but this phase is the main reason funding is difficult to arrange for projects because of the uncertainty. The government would be able to go ahead with more infrastructure projects during this recovery period and many commercial projects would be funded that would not happen without this plan. The economic impact would be substantial and tax revenue of around £20 billion (on £100 billion) would be generated each year since the guarantees would be reissued when they are redeemed for new projects. The government would also receive the £2 billion fees generated each year.
The proposal could be implemented in a few months and project management could be sub-contracted to well-established firms. If the EU can propose something similar there is no reason why the UK could not do the same. If you can think of a reason why not or can improve on the concept, I would be interested to hear your thoughts.
That’s all for this week, more observations next week.