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People and MarketsCommentGC View

Starmer’s recovery bond idea deserves a chance


UK Labour Party leader Keir Starmer has proposed a “British Recovery Bond” — a retail government issue that would be used to finance SME lending to help kick-start the economic recovery from the coronavirus pandemic. It can be tempting to dismiss such measures as political posturing, but there are some genuine advantages to the proposal, and it deserves its day.

The obvious objection to retail government bond programmes is that, to entice anyone to buy them, they will likely almost certainly have to pay above the market rate. That, by definition, makes them an inefficient tool for raising capital.

Worse, Starmer’s critics may argue, that premium demanded of the tax payer will go straight into the pockets of those investors wealthy enough to own assets such as Gilts. And all for what? Something that the Gilt market is quite capable of funding as it is.

But there are some real advantages to retail government investment products. In times of ultra-low interest rates, High Street savings accounts provide returns little better than stuffing the cash in a sock under the mattress.

While the government and central bank want to encourage consumption, savings still have an important role to play and such a government product is a public good. Premium bonds are all very well but they offer no guarantee of any sort of return and there is no reason not to offer some kind of long term inflation linker product to the retail market.

The UK could also follow the example set by Italy and offer a payout linked to British economic growth. How would that be for investing in the country's future?

There is also the question of market resilience and diversity of funding sources. The UK is fortunate to have a strong and essentially captive domestic investor base. UK pension funds have few options when it comes to placing sterling in high quality assets, but in a free society without China-style capital controls, the Debt Management Office must still treat its buyers with care lest they take their money elsewhere.

Speaking of the fluidity of capital, around 30% of UK government debt is held by foreign investors. If Brexit hammers UK growth, they might be less willing to hold its sovereign debt.

Domestic retail investors are far less worldly when it comes to allocating their capital and have more reasons to stay invested than to disappear into, say,  eurozone govvies.

Paying a small spread over market rates to UK retail savers might not be the most efficient way to raise money, but the positives might still make it a worthwhile exercise.