What the Chancellor can do tomorrow

by Dr. Ros Altmann

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George Osborne has a very difficult task tomorrow – how to boost the economy a bit, without frightening the markets. He also has the political problem of satisfying Tory and LibDem voters who have suffered so much as a result of high inflation over the past year.

The fiscal situation is so dire, he must rein in public spending, so he is desperately looking for new sources of funding. Thus far, the Bank of England has helped out enormously with its monumental gilt purchases, but he cannot rely on that for too much longer. He needs to restore some confidence for older savers and also find ways of helping the jobs market. Companies have plenty of cash, it’s small firms that are struggling but who also have the potential to create jobs in the short-term.

I would say there are three core themes he should focus on

1. Pension fund infrastructure investments: He should harness the power of pension fund investment to help stimulate the economy and create jobs. That will be far better than those funds buying gilts which have been artificially distorted by QE. There are hundreds of billions of pounds in pension funds which are needed to pay out pensions for the coming decades – most of the money is not required straight away – and if that money were invested in British infrastructure, it could generate growth as well as good returns. Of course there may need to be a Government underpin to protect inflation-linked returns, but that will be far cheaper than borrowing the money in the markets. Currently, it is overseas pension funds that have invested far more in our infrastructure projects and will reap the rewards, while our own have been encouraged to focus on ‘risk reduction’ by switching to gilts. This is not going to generate good growth and in fact carries new risks following the artificial manipulation of the gilt market by the Bank of England.
2. Extend ISA allowances: He should acknowledge the suffering of savers and offer them some help. This would include increasing ISA allowances, so that whatever meagre interest savers do earn will at least not be taxed as well, and also freeing up the terms of ISA products, to remove the artificial distortions between cash and other investments. The Government should not dictate private asset allocation. This will help older savers in particular and will increase spending in the economy.
3. Help for long-term unemployed over 50s with training and re-skilling: We need measures that show the Government recognises the value of older people’s input to society. This could include extra help to get the long-term unemployed in their late fifties back to work, with training and re-skilling programmes for example. Encouraging part-time work for older people too. Given the huge importance of older people’s spending power (they are normally the ones without big debts who can afford to spend more of their income) as well as the demographic pressures, we need to restore confidence and spending for older groups.