The forthcoming Autumn Statement brings to mind the old quote from Bill Clinton’s adviser James Carville about wanting to be reincarnated as the bond market – because then he could intimidate everyone. Philip Hammond, the new chancellor, should beware the so-called bond vigilantes.
The chancellor is looking for innovative ways to shift the cost of financing infrastructure investment from the public balance sheet onto pension funds – and investors have been clamouring for such assets. But continuing to meet the UK economy’s financing requirements requires more than this.
Investors took the departure of George Osborne and his deficit reduction targets in their stride. But they have been less sanguine since Theresa May’s closing speech to the Conservative Party conference, when the Prime Minister espoused the virtues of big government and promised to stymie the corporate sector after some high-profile examples of poor behaviour.
Of course there’s no excuse for preferring dividends over pensions or mistreating workers. But the UK’s proud sixth place in the World Bank’s Ease of Doing Business survey is one of the reasons that foreign investors fund both the UK’s current account and its fiscal deficit. Whatever structure might be envisaged for developing or replacing the Private Finance Initiative, its viability will remain a function of the government’s borrowing costs.
Therefore, as a priority, the Autumn Statement should restore the UK’s reputation for liberal economic policy, which has been an ever-present feature of the foreign direct investment boom that Britain has enjoyed in recent decades.
Some common-sense saving reforms are pending, such as broadening the coverage of auto-enrolment pensions, but they will heap more pressure on small firms already facing uncertainty.
However, unless the UK’s domestic economy can become more competitive, increasing savings – regardless of incentives – means reduced domestic spending. As the new chancellor should surely recognise, if the UK becomes less business-friendly it is actively courting recession.
This article appears in the October edition of City A.M. Money magazine, which is distributed with the paper on Thursday 27 October.