At the start of my career (1970s), a distinguished financial writer explained to me his rules for reading a budget speech.
First, the more popular it is on the day the more likely it is that it will be viewed as a disaster in the long term.
Second, if it is unpopular on the day you’ll never be forgiven, even if you’re right.
Finally, beware the ungrateful beneficiary.
The latter is particularly interesting. Those who benefit will feel that they’ve won the argument and been tossed a sop, rather than the full offer.
The political theatre and the economic messages can be a heady mix. Yet as an “event” it can set trends that will impact for years or decades to come, despite the often short-term focus.
So, George Osborne’s budget was very popular on the day. In fact it was viewed as the most popular conservative budget since 1988. That was followed by a property crash that took 10 years to recover from. Can this year’s effort avoid the above rules?
Given previous experience of Serps, Endowments and PPI and low returns on annuities, many of those experiencing the pensions freedoms this year will have been bruised by at least one of the above financial mis-selling or poor practice in the last few decades.
So, there is a need for new financial tools to fund longevity and pensions. Will consumer trust be further eroded or can Financial Services create “Socially useful” innovative products?
If we repeat the earlier problems we can expect 10-30,000 people in the first year of pension freedom to be “ripped off”. Put it another way, each M.P could have around 5 constituents complaining in the first year. If we get the downside, it is I think inevitable that the reforms will come to be seen as a “stealth tax” on pensioners. It is important to note that the Treasury figures indicate a tax increase based on exploitation of these new freedoms.
Pensions are, of course a long-term investment, so a long-term model that is relatively low risk and produces predictable incomes is desirable.
Given the shortage of social housing in the UK and the underperformance over 30 years in house building, could this be a vehicle to meet individual, social and economic goals?
My suggestion is that a 50 year municipal bond could be open to individual subscription with say a 3% premium secured against rents. If right-to-buy is exercised, then a with profits arrangement could top up the premium with say 50% going to bond holders and 50% being reinvested in the housing stock.
Local authorities need new financial instruments to fund their activities and increased housing in an area can contribute to keeping local taxes under control. Furthermore, by building housing to low-carbon standards and designed for age and long-term condition friendly accommodation, local government could contribute to sustainability, fuel-poverty alleviation and allow elderly people to stay independent for longer, securing better management of welfare budgets.
This type of instrument might be applicable for infrastructure investment where there is a potential for long-term income streams. The Federation of Small Businesses has complained about UK broadband provision being not fit for purpose (I agree with them). Could universal fibre networks and in time 5G infrastructure be funded by such an arrangement? If so there would be clear economic benefits, notably in rural settings.
For me personally, facing these pension decisions in the next few years, I would find such instruments as good citizenship contributions as well as financially sensible.
The UK will need to invest heavily in infrastructure to remain competitive over the decades to come.
Can the new pension freedoms help rebuild trust in Finance or will we face another scandal a decade down the line? Time will tell.