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The government yesterday unveiled plans to tap pension funds for the lion’s share of an investment of up to £30bn in big building projects to help to revitalise a stagnant economy forecast to slip back into recession next year.
The measures are the latest in a drip feed of government announcements ahead of Finance Minister George Osborne’s Autumn Statement yesterday when growth forecasts will be cut as the eurozone crisis bites.
The Conservative-led coalition has made its priority to erase a budget deficit that peaked at 11% of national output. It is cutting spending by around a fifth across most government departments, but the domestic squeeze has coincided with plunging demand from continental European markets hit by the eurozone crisis.
The unemployment level has hit a 15-year high and the government is likely to fail to hit a target of wiping out the structural deficit by 2015, when the next election must be held.
Responding to industry calls to help companies to access cash, Osborne announced measures on Sunday to underwrite £20bn of loans to smaller companies which are struggling to get credit.
Analysts backed the plans but said that they would take time to feed through into the economy.
Treasury Minister Danny Alexander said that the government would reallocate £5bn of spending to capital projects by 2015 but crucially added that a deficit-cutting coalition would not borrow any more.
“Through working with British pension funds, we’re identifying ways to unlock around £20bn of pension fund investment to go into privately funded infrastructure,” Alexander told BBC Radio 4.
Osborne said the government could invest up to £30bn in schools, roads and rail projects, a much needed boost for the country’s creaking infrastructure. He got a boost yesterday when the head of China’s sovereign wealth fund said the country was keen to invest in the ailing infrastructure of western countries, especially Britain.
“Britain has got to get away from the quick-fix, debt solutions that got us into this mess,” Osborne said. “We’ve got to weather the current economic storm but we’ve got to lay the foundation for a stronger economic future.”
Pension funds are looking to ensure better returns after yields on government bonds or gilts fell following buying by the Bank of England and by investors seeking a haven from eurozone turmoil.
Pension funds saw great potential in the scheme but again its effects would take time to work through. “This could be a real win-win. The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments,” said Joanne Segars, chief executive of the National Association of Pension Funds. “Pension funds hold over a trillion pounds in assets, but only around 2% of that is invested in infrastructure. There’s the potential for that to be much higher.”