Julian Knight: Cherish those who save, George, for they are the future of the country

 

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The Independent Online

Something game-changing but cheap, or even free, is needed in this week's Autumn statement. No pressure then, George. Business will rightly dominate because at the moment the economy is paralysed by fear.

Cash-rich firms – and there are a surprising number of them out there – don't want to spend on capital projects. A way has to be found to free this up. The eurozone crisis is right now spooking the UK into recession. And this applies to consumers too, who can smell job losses in the wind. A temporary cut in VAT would help spending but at a huge cost to both the Exchequer and to the long-term credibility of the national finances.

Perhaps what Mr Osborne needs to do is to think more medium-term about the consumer, while acting short-term on business. By my estimates, since 2007, and with the reduction in interest rates to an entirely false level, savers have subsidised borrowers to the tune of about £100bn, and yet our economy is still smaller than it was back then.

I'm not suggesting that there should be a dramatic rise in interest rates – if historic norms were in place the bank base rate would be around the 7 per cent mark right now – that would kill the economy stone dead. However, there needs to be more of a signal that savers are actually cherished rather than being everyone's cash cow. Consumers can't borrow their way out of this mess (you just arrive in a worse place in a few years' time); we need a more gradual move towards balancing savings and borrowing.

The coalition has made positive moves by linking rises in the ISA annual allowance to inflation, and any thought of backing off from this needs to be discounted. A longer-term change in culture is needed – simplification of the tax system and greater incentives to save are required to repair the damage done by Labour's unsustainable boom years.

One idea doing the rounds is that the Chancellor plans to relax the rules governing the type of investment that pension schemes can invest in. This would allow pension funds to buy into major infrastructure projects such as railway upgrades, toll roads and, who knows, even schools, hospitals and prisons.

The idea is to bring much-needed private cash into infrastructure while giving pensions a long-term alternative to bonds and shares. This could help tackle the often unspoken part about the pensions crisis: that our savings and investments aren't earning anywhere near enough to keep up with life expectancy or inflation.

After a decade of shares tanking and returns on government bonds disintegrating – at least those considered still safe enough to invest in – there is a crisis of returns in pensions.

But would such a scheme actually help? I can see why the Government should want to mobilise pension-scheme cash to build infrastructure – it doesn't have any money of its own – but I can't help but think about such acknowledged disasters as Gordon Brown's private-finance initiative (some of our hospitals will never be able to repay the debts loaded on them through this scheme), and previous state-inspired projects such as bridges and tunnels, which still haven't paid for themselves decades later. Then there is Eurotunnel, which is a monument to wishful financial thinking.

Also, UK pension funds may have missed the boat. Canadian schemes and other overseas funds have been buying into British utilities for years. Ultimately, of course, any such arrangement will have to be underwritten by guess who? The taxpayer. Infrastructure may seem a solid investment, but I don't think I'd fancy it in my pension fund without some real scrutiny.

Pensions: an unfair strike

It feels like nearly everyone in the public sector will be on strike this Wednesday. Their anger is understandable, no one likes having what are perceived to be less fair terms imposed on them, austerity or no austerity.

I also think a lot of the right-wing press commentary on this is mealy mouthed – along the lines of "all because I don't have such a nice pension, public-sector workers shouldn't have one either". Far more relevant is the fact that the promises being made are having to be backstopped by the taxpayer. And this isn't a small potential liability – it's tens of billions, at best.

It's simply unfair to ask those in the private sector to do this when they don't benefit. And the old argument that the pensions made up for poor pay isn't supported by the facts. Basically, new joiners to the public service overtook their private counterparts in terms of wages and pensions in 2004, and the gap in favour of public-sector staff has been increasing ever since. Today, there are proportionately more higher-rate taxpayers in the public than the private sector, and the hoary old line that the unions come out with about bankers earning more is, frankly, insulting the ordinary private-sector worker.

The offer on the table protecting current rights and career averaging schemes is actually very generous and should be accepted. The battle for public opinion is already lost and I know of at least one very senior cabinet minister – and it's not a dry Tory – who thinks the strikes will work in the Government's favour.

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