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The war on debt

With the UK trying to recover from its worst financial crisis since the Second World War, Lee Jones looks at a solution that harks back to the patriotism of the war years

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The Government is set to outline a package of austerity measures on June 22 to help realign the UK’s finances but could the Government raise money outside of taxes and spending cuts?

One possible answer could be an austerity bond or UK bond whereby people could invest directly into the economy.

Currently, the annual budget deficit stands at £163.4bn or 11.6 per cent of GDP, according to the Office of National Statistics, which is the highest deficit since 1945. During both the First and Second World Wars, the Government was so desperate for money that it launched war bonds as a means of paying for the war effort and reducing Britain’s post-war deficit.

By 1945, more than £1.7bn was invested in war bonds, which would now be the equivalent of around £54bn.

Now that the UK has a similar deficit to the one amassed after the Second World War, is it time to call on the British public to rally round the problem?

Seven Investment Management director Justin Urquhart-Stewart says: “We don’t have to have a war bond but an austerity bond to pull in public savings for the national debt could be a good marketing idea in this new age of austerity.

“Now is the time for some effective imagination and even marketing of what has to be the worst product you can think of – paying back the debt.”

While Urquhart-Stewart admits such a vehicle would not be the complete solution to the nation’s debt problems, his idea of using national spirit as a means of saving the economy is something that has been considered in the past.

After the pound’s devaluation in 1968, Prime Minister Harold Wilson launched the I’m Backing Britain campaign in an attempt to keep the economy buoyant.

He called on the public to buy British produce, save more money and support British jobs and investment. Also, after the 9/11 attacks in the US, the Bush administra-tion considered reissuing war bonds as a means of raising much-needed capital.

’Now is the time for some effective imagination and even marketing of what has to be the worst product you can think of – paying back the debt’

Urquhart-Stewart admits that an austerity bond would not be seen as a panacea but would primarily be a strong message of the importance and urgency of the problem and the need for the country to pull together while offering people an incentive to save.

He says: “Such a bond could have some additional features of a tax bonus in five and 10 years, especially if transferred into a pension or long-term savings vehicle.”

Highclere Financial Services partner Alan Lakey says: “It is not such a crazy idea and if it were a bonus version of National Savings and Investments it could work. The only problem is it just means more Government borrowing and the only way it can do that safely is to borrow cheaply. So essentially the British public would be subsidising the debt. The main point would be that such a bond would give the British people something to rally around.”

Bestinvest senior investment adviser Adrian Lowcock says that while the sentiment is admirable, it would be difficult to convince people to invest in the nation as they did after the wars.

He says: “After a war you are coming into a period of recovery but we are coming into a period of austerity after years of excess, so the cultural fit might not work. Also, as an IFA, I would have to ask whether it is better for an individual to invest in the UK or in a company like Tesco? Right now, there are a lot of investments which look safer than our Government.”

Lowcock says the Government should instead look to encourage investment into UK business as a means of funding the recovery.

He says one way could be to make venture capital trusts more appealing by adding more tax relief or freeing up restrictions around them.

Urquhart-Stewart says the ultimate message should be one of pulling together. “It is not an easy task but for a new Government relying on goodwill and others’ blame will soon land them in trouble,” he says.

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