The centrepiece of Keir Starmer’s big policy speech on Thursday was a proposal for a new ‘British Recovery Bond’. It’s a nice idea on paper and many other people, from both left and right, have backed similar schemes. But it’s still hard to see what it would actually achieve in practice.
To recap, the plan is to raise billions of pounds directly from the public with a new government-backed investment product that could draw on the surplus savings from the pandemic. This money would then be given to a state-controlled National Infrastructure Bank (NIB), which would invest it in ‘growing business and the jobs of the future’.
This might have additional social benefits. The Labour leader said the British Recovery Bond would provide ‘financial security for millions of people – many of whom have saved for the first time’.
Others have suggested that the scheme might be a good way to tap into people’s desire to help out in a time of national crisis. They could also help to ensure that surplus savings are productively invested, rather than diverted into ‘over-valued’ stock markets or a potentially inflationary consumer boom. (Ben Chu has helpfully summarised the thinking here.)
So, what’s not to like? For a start, it’s not obvious what the problem is that this proposal is trying to solve.
The British Recovery Bond is being touted as something that Labour would introduce as soon as possible. However, the government is already finding it easy to borrow huge amounts of money at ultra-low interest rates by selling ordinary bonds (‘gilts’). Even without the help of the Bank of England, there’s no shortage of private savings looking for a safe investment (and there will be for at least as long as the economy remains weak).
Appeals to the good that might be done with the money raised from a British Recovery Bond, such as ‘rebuilding communities’ and ‘levelling up the regions’, are therefore a red herring. If these projects are indeed worthwhile, the government should be able (and willing) to fund them from other sources.
It’s also odd to pitch the British Recovery Bond as a boon for savers. There are already plenty of government-guaranteed savings products that provide ‘financial security’, including conventional National Savings (NS&I). There are also already plenty of ways in which people can save safely, or invest in their local community or UK businesses. This includes private vehicles where the Financial Services Compensation Scheme (FSCS) already provides a large amount of protection.
There are still many other unanswered questions. Interest rates on National Savings are currently very low (and some products have been withdrawn completely), mainly because the government can borrow so cheaply elsewhere. But what then would the interest rates be on the new British Recovery Bond?
There are only three options: below market rates (which would be a bad deal for savers), above market rates, like George Osborne’s infamous ‘Pensioner Bonds’ (which would be a bad deal for taxpayers), or ‘similar to market rates’, as Labour has suggested (what then is the point?).
The other terms of the new product would be important, too. It’s being suggested that the British Recovery Bond would have a ‘long maturity’, but people ‘should be able to withdraw their savings early’. This would create a big problem (a form of ‘redemption risk’) for the borrower. (Bear with me on this…)
For example, 10-year gilt yields are currently just over 0.6%. A British Recovery Bond with a 10-year maturity could therefore offer 0.5% and still be cheaper for the government. However, if savers can cash them in sooner (and they presumably would if interest rates elsewhere started to rise), this could quickly become borrowing at a much shorter maturity.
In contrast, 5-year gilt yields are only a little above 0.1%. In practice, the Bank of England has swapped gilts for central bank deposits, currently paying 0.1% exactly. Thus, at any interest rate above 0.1%, the British Recovery Bond would effectively cost the government money.
The government could get round this problem by imposing large penalties for early withdrawals. But then it could be asking people to tie up money for a long time, including relatively inexperienced small savers who are new to the market.
In summary, there isn’t a lot of mileage in a British Recovery Bond. It might bring in a few tens of billions, but this is small change in the context of overall public spending. What’s more, NS&I is already expected to raise about £35 billion for the government this year. This could turn out to be little more than a rebranding of existing products.
Above all, governments and state-owned banks should finance themselves from the cheapest possible source. This is unlikely to be directly from retail investors. If this is really Labour’s ‘big idea’, I’d think again.
First published by CapX on 19th February 2021