Chris WagstaffThe principal factor holding back the UK economy is a lack of demand. This is causing companies to shelve capital spending plans, hoard cash and put any hiring decisions on hold. As a consequence, the consumer, who holds the key to two thirds of the demand in the UK economy, continues to deleverage.
When demand is needed to stimulate growth and the private sector is holding back, the public sector needs to step in and focus on that aspect of demand-inducing spending that is likely to give the economy the biggest bang for its buck. Just as in the 1930s, one needs look no further than the implementation of a comprehensive government-led construction and infrastructure spending programme. After all, this (along with WW2 financing) is what pulled the world economy from the mire in that last great downturn.
Indeed, a mild fiscal stimulus devoted to construction and infrastructure spending is exactly what both the Confereration of British Industry (CBI) and the British Chamber of Commerce (BCC), which represent the interests of around 300.000 firms, have advocated, each having downgraded their 2012 GDP forecasts for the UK economy at the end of August, from growth of 0.6% and 0.1% respectively to a contraction of 0.3% and 0.4% for the calendar year.
Not that either is suggesting the government abandons its austerity measures, which would, of course, prove calamitous for the UK's coveted triple-A credit rating. What they are instead calling for is changed spending priorities that re-emphasises job creating capital spending, which has taken a considerable hit under the government's austerity measures, at the expense of less productive public consumption spending. Jobs would not only be created by the initial project spending but also through the so-called multiplier effect of this spending filtering down throughout the economy. One person's spending becomes another's income.
Although this would probably entail the government tapping the markets for a little extra cash – at a time when the Chancellor looks increasingly likely to miss his two fiscal rules of bringing down the debt-to-GDP ratio by 2015 and eliminating the cyclically adjusted budget deficit within 5 years – the chances are that the markets would see this moderate fiscal stimulus as being consistent with the Chancellor's commitment to a firm fiscal plan.
However, given that the government cannot single-handedly finance the capital spending needs of the housing, health, transport, utilities, energy and communications sectors, the Treasury has committed to guaranteeing £40bn of greenfield infrastructure projects against construction delays and cost overruns for those investors to whom infrastructure offers a valuable source of secure, long-term, inflation-linked cash flows. And this is where pension schemes with their deficit reducing and de-risking needs come in.
Of course, infrastructure investment demands considerable due diligence and monitoring but for those schemes that are able to sacrifice some of their liquidity and up their investment governance – unless of course, an indirect investment is made via an infrastructure fund – a well thought out allocation to infrastructure will not only prove to be a sensible de-risking asset but one that should also trump swaps and bonds in additionally providing a fillip to the asset side of the balance sheet.
