In this week's blog, we take a closer look at the latest round of spending commitments from the Chancellor and ask a straightforward question: is there a third option beyond tax and debt? At the time of writing, having just announced £11 billion in planned government expenditure across all sectors, the common misconception is that tax and debt are the only two valid capital-raising options for governments, as the commonly debated and historically attempted third option, scrimping on the basics, tends not to work. Beyond the removal of the occasional element of public sector wastage from budgets, which isn’t significant, it's never possible to cut sufficiently, albeit it sounds responsible in rhetoric.
Frugality on a nation-state level isn't like trimming a household budget or maybe considering one's position on having both Netflix and Disney+; the realised costs of maintaining a growing economy organically compound, so ironically, healthy economies will always cost more and more to run, they can never self-sustain, so however much you cut, it will never be enough. However, what if the third option wasn't to cut but rather to restructure - and instead of trying to play the game at a higher and higher level of debt creation, you take another facet of the economy that isn't working and combine the two together?
One of these ideas is Megafunds, a proposal quietly put forward by the government that could theoretically allow capital raising for what is required without reliance on any of the above. Pensions Minister Torsten Bell has set out a series of reforms that will seek to combine tens of billions in defined contribution pension schemes into funds capable of moving the needle on a series of much-needed UK infrastructure projects, solving, in theory, problem number one, that being how do we pay the tab without tax, debt, or scrimping, and solving the potential problem number two, pensions.
The United Kingdom's pension system is facing significant pressures—from demographic shifts to economic instability—raising serious doubts about its long-term sustainability. As traditional retirement income sources like state pensions and defined benefit workplace pensions become less reliable, the idea here is that the entire pension system starts to indulge more in UK private assets, stops chasing yield abroad, and focuses on the needs of the UK taxpayers, with an understanding that higher returns can be achieved with an optimistic belief that we can make the UK, I hesitate to say, great again?
So where is the rub here? The primary issue highlighted by fund managers in the financial media is that they wouldn’t be asking nicely. These could be mandatory targets in all but name, creating a substantial disconnect between the immediate needs of contributors, i.e., assets in the fund that provide a yield that translates into adequate income for retirement, and the country's needs, long-term investment into infrastructure projects that may dramatically overrun themselves and be subjected to ever-compounding costs. Pension schemes could almost end up overpaying for assets they don't want - just because we need them and at that point, it isn't two problems make one solution; it's the old staple of one problem leads to another.
So where are we heading with all of this?
Well, the question we are perhaps asking ourselves is, if we are shifting the paradigm here, and looking at new ways of doing things, could the IFISA play more of a role in contributing to a sustainable retirement income strategy? Unlike traditional bank savings, IFISA investments typically go directly into real economic activity—funding SMEs, housing developments, and businesses. Thus, they also serve this dual purpose without perhaps generating a tidal wave of unforeseen consequences: they generate income for investors and support UK economic growth; without gargantuan structural change, they run alongside and within the existing structure.
Given the unique benefits of IFISAs, their limited uptake remains a missed opportunity. As of 2024, less than 3% of all ISA subscriptions are allocated to IFISAs. A significant opportunity that could be explored here is encouraging investors to build parallel retirement income through IFISAs, thereby directly easing the fiscal burden on the state that's front and centre in these concerns. The more individuals can support themselves through personal investments, the less reliant they will be on public funds. The more capital is directly invested in infrastructure, such as housing, the less the burden on the state. Two problems become one solution, and if used wisely, IFISAs could help the UK move toward a more resilient and self-reliant retirement system—one where individuals are empowered to take charge of their financial futures.
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