- British Recovery Bond “could raise billions” for pandemic recovery
- Proposal comes amid intensifying battle for savers’ cash
The name’s Bond. British Recovery Bond.
On Thursday, Sir Keir Starmer unveiled his proposal to marry the hundreds of billions of pounds sitting in Brits’ savings accounts with the task of revitalising the UK economy in the wake of the pandemic.
The plan, billed as Starmer’s most important speech since assuming the Labour party leadership, was light on details but mentioned the introduction of a ‘British Recovery Bond’ that would give “millions of people a proper stake” in the country’s economic future.
“This could raise billions to invest in local communities, in jobs and in businesses,” he said. “It could help build the infrastructure of the future; investing in science, in skills, in technology for British manufacturing.”
The Labour leader said the bond could provide a useful home to the savings many households have built during repeated lockdowns, much of which the Bank of England has suggested is unlikely to be spent in the near-term. Starmer added that increased levels of cash hoarding were “understandable” but wouldn’t help to “rebuild our country and it won’t do much to help savers”.
To succeed, the proposal would need to clear two high – and arguably conflicting – hurdles: selling debt at a price that represents value to the taxpayer, but at a high enough yield to entice savers.
Failing the former test would leave Labour open to the charge of paying too much to borrow at a time of acute fiscal strain. So far in 2021, the UK government has sold more than £32bn in long-dated bonds to debt investors at an unweighted average interest rate of 0.55 per cent and an average term of 18 years.
Among those sales was a £3.25bn bond maturing in 2024 with a -0.03 per cent yield at the accepted offer price. This is partly down to the government’s strong standing as a creditor, although conditions have also been about as good as it gets for debt issuers, notwithstanding the recent upward revision in inflation expectations.
The conditions also help to explain why state-owned savings bank NS&I slashed the interest rates on many of its products in November. Put simply, cheaper debt capital is available.
Unfortunately, ordinary savers are likely to want more for locking up their cash for years at a time, even if patriotic duty cannot be entirely discounted.
The speech arrived on the same day that life insurer Aviva (AV.) entered the savings markets. The new venture, Aviva Save, offers savers a range of products with terms ranging from six months to five years, the highest-yielding of which is a two-year fixed rate bond from buy-to-let mortgage provider Paragon Banking (PAG).
The Treasury would probably need to make an offer at least as good as this to attract billions of savers’ money. This, however, could face a pushback. Soon after the pitch, ITV political editor Robert Peston pointed out that the sale would likely redistribute income to individuals with more savings and higher earnings.
A more radical solution might be to double down on state borrowing and embrace inflation, which would at least raise mortgage-owners’ hopes that the value of their debts might shrink in the coming decade. Of course, this would also involve tough choices and pose a threat to asset prices.
All of which increases the likelihood that at some point, UK politicians may be forced to pin the chances of an economic recovery on higher taxes.
