Julian Knight: Don't let Osborne put us off infrastructure plan
Whatever the Chancellor's personal standing with the public, urging pension funds to invest in capital projects is a good idea
Sunday 10 June 2012
Unfortunately, for Chancellor George Osborne the "omnishambles" of March's Budget has flicked the tiller of popular opinion. He was hardly likely to be anyone's hero but his stock is diving towards zero. And like many politicians who have had their reputation severely damaged even good ideas are greeted with howls of derision.
Take the confirmation that pension funds are to be encouraged to invest in large infrastructure projects. Now this idea – a world away from Gordon Brown's atrociously structured private finance initiative – can work for everyone, as it has successfully done in Canada. We desperately need renewed infrastructure and pension funds need long-term steady returns.
If you were a pension fund manager what would you rather be invested in: a length of motorway bringing in regular tolls or a government bond?
Since 2007, pension and fixed income fund managers have been awash with government stock. I was speaking to a manager last week who confessed the reason he continues to buy is because there is "nothing else to buy and I have to buy something". What sort of investment strategy is that?
When the history of this period is written it may be seen that we compounded the errors of the crisis by making our institutions and pension funds buy so much government stock. Instead of providing strength, the rush has embedded fundamental weakness.
Here's how it goes: financial crisis sparks recession, which in turn sinks state finances, debt is issued in masses and bought by financial institutions that are told they have to own the debt, as it is defined, according to pre-2007 parameters as "safe".
But the issuing of so much debt makes it less safe because it pays so little; gets eroded by inflation – and soon mass devaluation – which in turn makes us question the safety of the institutions which hold it.
Let me boil it down. Government stock, issued by most developed nations, is a poor asset and our pension funds hold too much of it. They need to balance it with something genuinely "safer" and it logically lies in what underpins the fabric of society – the infrastructure. The Chancellor's move won't save us from what is to come, but it points to where we have to go next.
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