According to The Guardian, Chancellor George Osborne has asked the Treasury to come up with a scheme to encourage individual savers to invest in a new type of bond that would be used to finance infrastructure development. The government may agree to "take the first loss" on any deals that go bad, in order to keep the level of risk to individual savers at an acceptable level, and may offer tax breaks similar to those on the existing ISA (individual savings account) scheme.
The fact that this idea is under consideration probably means that hopes of getting pension funds to step up to the plate for infrastructure financing are fading. Indeed, the latest data suggest that these funds have been stepping back from the sector, in the UK and elsewhere. Getting individual savers involved seems like a decent alternative, although the setup and administrative costs could be very high.
But aren't the banks going to scream blue murder? The existing National Savings & Investment (NS&I) programme, which used to provide investors with a variety of risk-free ways of lending money to the government, has been under sustained assault from the commercial banks ever since the financial crisis, because it had the temerity to offer rates higher than those that the banks themselves saw fit to pay. The government -- i.e. George Osborne -- has bowed to the pressure from the banks and forced NS&I to withdraw much of its product range.
"Osbonds" may be even more inimical to the banks' interests. Not only will they compete for individual deposits, potentially boosting the banks' funding costs; they will also make it harder for banks to compete for the financing of infrastructure projects, which are generally a low-risk, long-term asset that's very nice to tuck away on the balance sheet.
Boosting infrastructure investment is such an obvious way of getting the economy moving that Osborne should ignore the cries of woe from the banks. But when it comes to the crunch, will he actually dare to do that?
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