David Green is CEO of Civitas
The Budget on March 3 should be much more than an occasion for explaining how to pay for the pandemic. The Government should seize the chance to strengthen our property-owning democracy and level-up opportunity through job creation. Equalising infrastructure spending is fine, but it will not re-energise the private sector, which alone can save the day.
The Budget could be a chance to fund a new investment bank that will put money into new productive enterprises without adding to national debt; switch expenditure from consumption to investment; and increase the equity stake of taxpayers in the productive capital of the country.
A similar idea was supported by both Keynes and Hayek at the beginning of the Second World War, the last time we faced vast public debts. In an article in the Spectator in 1939, Hayek made the case for setting up a trust fund that would give the holders of war savings an equity stake in the industrial capital of the country.
Adapting this idea to today’s conditions could be achieved by allowing holders of Treasury bonds to convert them to equity in the proposed bank at par value. With bond yields so low, the possibility of receiving dividends instead of interest might be very attractive.
If 2021 is to be a year of economic recovery, investment spending is likely to create more jobs than consumer spending. Moreover, now that we are out of the EU we urgently need to rebuild the nation’s productive capacity, not least to cope with the rules of origin under the EU deal, which typically require goods to be at least 50 per cent British. To meet the new obligations, some new factories need to be built.
The democratisation of ownership could be further deepened by selling bonds with an interest rate of one per cent, which could be converted to equity after 12 months. With interest rates so low, money would flood in and this would give everyone a chance to benefit from the nation’s success.
There has been an increase in saving during the pandemic, and investing in productive enterprises would be an ideal home for these pent-up savings. The risk of inflation, especially asset inflation, would also be reduced. Quantitative Easing has pumped vast sums into the economy and caused asset inflation. The new bank would attract funds that would add to our productive assets rather than inflating the value of existing assets.
Some will fear that this is a step towards a command economy, but that danger can easily be avoided. Many nations have sovereign wealth funds, usually controlled by their governments. The proposed investment bank would not be a state bank, but a limited-purpose private institution created by act of Parliament
In that sense, it would be no different from a building society or indeed a commercial bank. Both have legal frameworks that limit activity. The investment bank would be prohibited from ‘casino’ activity such as gambling in derivatives or in currency speculation. And if shares are to be sold on the stock market, as they should, it will be necessary to prevent a takeover by anyone hostile to its aims. This could be achieved by a golden share, much favoured in the Thatcher era, or by issuing dual shares of the kind favoured by Google and Facebook to preserve control of their original corporate objectives.
Supporters of a market economy will have their doubts, but this is not a plan for the Government to direct our economic life. It is using the powers of government to build institutions that will empower entrepreneurs, liberate animal spirits, re-vitalise the private sector, and extend our property-owning democracy.