My Week: Our economy vertainly needs a tonne of investment

What needs to be done, we agreed, was for the Chancellor to stop the mantra of cut, cut, cut

My fund manager friend was more bouncy than usual. “I’m gonna drop a tonne on every race,” he said, referring to his forthcoming trip to Cheltenham.

I wasn’t sure if that meant he’d be wagering £100 each time or £1,000, but I didn’t want to give him the satisfaction of asking. He doesn’t directly brag about the difference in our incomes, but does slip it in from time to time.

Anyway, I was glad of the call. It was early on Monday and I was seeking inspiration for that morning’s column. We discussed the Budget and whether the Chancellor would do anything at all to help him and his fellow stewards of our savings pump money into building roads, schools and houses.

What needs to be done, we agreed, was for the Chancellor to stop the mantra of cut, cut, cut and roll out more state cash to help fund projects that will benefit the country for decades to come. Interest rates may never be this low again; why not use them to borrow and invest in projects now?

Private money is there – pots of it – waiting to be invested, my pal said, but projects have to be structured to create a more attractive risk-reward balance. That means a little more co-investment from the Government, improved transparency around contract wordings, plus cast-iron assurances that the rules won’t change halfway through the investment’s life.

“The memory of Railtrack looms large,” he said, grimly. He was referring to how private investors in the rail network were wiped out when the Government triggered “force majeure” clauses that erased the guarantees they thought had made their money relatively safe.

With our fantasy Budget decided, we hung up, leaving me to my copy deadline and him to his Racing Post.

Let’s fund growth through equity, not debt

Another of my many pre-Budget chats was with a different big investor, whose wishlist included one of mine – a means of ending the way our businesses are based on debt, rather than equity.

It’s the modern disease: companies of all sizes are limiting their growth potential by borrowing from banks rather than by issuing shares. This is bad for the economy because banks are conservative – more now than ever – so companies will only ever get a limited amount of funding from them. By contrast, the amount you can raise through shares is only limited by the scale of your ambition and the strength of your business case.

Furthermore, with bank lending, it’s the same pot of cash being constantly recycled between companies. Raise equity, and you’re bringing brand new money into the system – from foreign sovereign wealth funds, new pension savings and the like. It’s an almost infinite supply of new cash.

My investor friend, who’s in his late fifties, put it like this: through most of his lifetime, the money he saved in his pension was invested in companies and projects that were inherently slightly risky, but returned decent interest as a result. So, his generation had not only helped provide the capital for our economy to grow, but were set for a prosperous retirement too.

Nowadays, particularly since the financial crisis, the world is so risk averse and hidebound by safety standards on investing that those in their twenties now getting their careers under way don’t have any of that. They may save, but their money is being parked in low interest-bearing bonds; they’re not taking riskier, potentially more lucrative, punts on equity.

So, what did all this have to do with the Budget? Plenty. Part of the reason why companies and project managers are loading up on bank loans, rather than shares, is that the taxman rewards debt but punishes equity. Shareholders are taxed multiple times, first with stamp duty, then on dividends, and then on capital gains when they sell up.

Debt, on the other hand, is positively encouraged by the taxman, so much so that the more debt you have, the more tax breaks you get. Bonkers.

Removing those tasty debt perks would not only raise more for the exchequer, it would encourage businesses to issue shares instead. It works in Silicon Valley, so why not here?

Infrastructure spending – what an anti-climax

Through Monday and Tuesday, nods and winks from Whitehall made it clear the Chancellor was going to make infrastructure a key element of the Budget speech. And he did, taking care to mention the Northern Powerhouse, and name-dropping a whole list of projects around the country that were getting the green light or being brought forward. But the amount of money on offer was pitiful. A few tens of millions here, a few hundreds of millions there. Another opportunity wasted by his vainglorious desire to hit his spurious deficit target.

On his return from a (disastrous) Cheltenham festival, my fund manager friend concluded it wasn’t all bad, though. That George Osborne keeps banging on about investment in the North helps companies when they rattle the can abroad for new money to invest in projects there. “The message is getting out to the sovereign wealth funds of the Middle East that there’s more to the UK than London,” my friend said.

The Chancellor also took away a couple of those annoying measures that encourage companies to pile on more debt – only a couple, but at least the balance against equity shifted slightly. And he made a commitment to devolve more decision making on planning to the regions. This is really helping get projects started quicker, said my fund manager pal.

For him, he said, the Budget had been OK, and certainly far more lucrative than the horses.