Duncan’s Economic Blog

Hypothecated bonds

Posted in Uncategorized by duncanseconomicblog on July 10, 2009

France is doing something very interesting. Issuing a ‘super bond’.

 Last month the French president announced plans for a superbond. This week he appointed two former prime ministers, Alain Juppé, a Gaullist, and Michel Rocard, a Socialist, to head a commission for four months to think about what to do with the money being raised.

Mr Sarkozy wants the two grandees to reflect on “priorities that justify an exceptional investment effort to prepare France’s future.” François Fillon, his prime minister, has written to all parties to ask for ideas. The bond will not be launched until 2010, and no amount has been specified. Mr Fillon says part will be open to individual investors: the French are among Europe’s thriftiest folk. The areas that could benefit from the money include research, innovation, renewable energy, education, health, biotechnology and infrastructure.

I really like this idea. Issuing a bond where the money is earmarked for a set purpose and where individuals can directly subscribe.

In some ways this is a natural extension of the Fabian argument about hypothecating taxes

Reporting the results of original quantitative and qualitative research into public attitudes towards taxation, Paying for Progress argues that the public must be ‘reconnected’ to the taxes they pay and the public services which these finance. To do this it proposes the greater use of earmarked or ‘hypothecated’ taxes, including a new tax to fund the National Health Service.

 If it works for taxes, why not for debt? Individuals looking considering where to hold their savings could make an active choice about the type of project they want to invest in.

I can envisage a ‘research and development bond’, ‘infrastructure bonds’ and ‘science bonds’.

The debate over the level of public debt is pretty depressing. The public seem convinced that all the money is simply being wasted. Bond issues such as these would be a good of demonstrating how the government is using the money.

 This could even be extended to Local Government. The Local Government Officer noted yesterday that on solution to the shortage of social housing would be to:

Build more housing, both by allowing local authorities to do that (getting there!) where the funding from the private sector has dried up, but also by taking on the “pickle rural England” lobby and accept that many market towns and villages need to grow to become viable, but also by encouraging housebuilding companies to build houses that look like they belong in their context rather than uniformly bland housing estates which could be in any settlement in any part of Britain.

 Why shouldn’t local authorities have the power to issue ‘Housing Bonds’?


10 Responses

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  1. Chris A said, on July 10, 2009 at 1:56 pm

    Is the idea here that the more popular bonds would attract more money, resulting in more spending in that particular area (if not, why would anyone care which bond they invested in)? If so, interesting idea. I always thought that one-person, one-vote was a fairly good way of deciding how to allocate public funds, but I guess one-pound, one-vote could also work.

    Isn’t there quite a big difference between debt and taxes, in that you don’t get to choose which of the taxes you feel like paying?

  2. duncanseconomicblog said, on July 10, 2009 at 2:03 pm

    The idea is

    (i) To attract new pools of money by tapping people’s savings directly.

    (ii) To fund stuff that otherwise might not have got funding

    (iii) To demonstrate the type of stuff that government debt is often used to fund.

    Now obviously this could only be doen sparingly. Maybe 1 or 2 issues a year.

    To an extent this wouldn’t be soending ‘public money’ it would be providing a vehicle through whihc people could collectively fund projects they supported. The Government here would be an enabler.

    And yes taxes are different. And again you can only get away with a few hypothecated taxes.

  3. tim f said, on July 10, 2009 at 3:56 pm

    My instincts are against hypothecated taxes: people who contribute more tax get to decide how government money is spent rather than deciding it democratically with everyone having an equal(ish) say.

    This could fall into the same difficulties. Investors could end up deciding government priorities because more investment was available in one particular area than another. In fact, if investors didn’t have this power they would be likely to say “Why invest? By investing in one area which the government would’ve funded anyway I’m only freeing up funds for the government to spend in other areas with which I don’t agree”.

    I’d be less resistant to the idea for local government. There are similar pitfalls, but the difference is that it’s much more difficult for local government to raise money, whereas government bonds are always going to be attractive investments whether for general purposes or hypothecated.

  4. charliemarks said, on July 10, 2009 at 11:31 pm

    In isolation, there’s the risk hypothecated taxes hand power to those with more money than most – but seen as part of a strategy of redistribution, I’d be okay with that.

    I think Tim’s point about “why invest” is interesting. Areas we know the government could spend more on, or that we’d like to protect from cuts – that would give a good impetus.

    I’d very much like to see a growth in the municipal bonds market, as part of decentralizing powers from central to local govt – but this must be done in conjunction with ensuring that councilors face reelection when people are likely to vote – at a general election, where turnout is higher.

  5. […] I will seek to give some shortish shrift to Duncan’s well-intentioned but I suspect slightly bonkers-when-you-think-it-through-and-possibl… based on a cunning plan by the […]

  6. Tim Worstall said, on July 11, 2009 at 8:36 am

    “If it works for taxes, why not for debt?”

    Bad argument, for it doesn’t wok with taxes. For a very simple reason.

    How much you can raise by taxing a certain item or activity has absolutely nothing at all, no logical or empirical connection whatsoever, to do with how much it might be desirable to spend on another specific activity or item.

    For example, smoking costs the NHS a couple of billion a year to treat. But we raise 8 billion in tobacco duty because those who do smoke really want to smoke.

    If we were to tax petrol according to CO2 emissions damage (as the fuel price escalator since 1993 says we should and using Stern’s numbers for the damage) petrol would be 12 p a litre cheaper than it is: demand for petrol though is pretty price insensitive so we can tax more than that.

    We also use taxes to achieve social goals (I’m not saying I agree with doing so, just that we do), like the 50% tax rate: it’s bugger all to do with the revenue now, is it?

    How much might we want to spend on other activities though? Take the smoking tax. 6 billion or so there: why should the fact that smoking is relatively demnd insensitive to price determine how much we spend upon, say, the provision of child care? What connection is there? And, if people get the message that smoking is bad for them and stop doing so, should we therefore spend less on child care?

    No, hypothecation of taxation is a bad idea in its very basic logic. Tax where you can, spend where you need to but into and out of one pot.

  7. ad said, on July 11, 2009 at 6:41 pm

    “The public seem convinced that all the money is simply being wasted.”

    I hope the public is right, because spending will probably have to be cut be a fifth, simply to balance the books.

  8. newmania said, on July 11, 2009 at 7:34 pm

    Paying for Progress argues that the public must be ‘reconnected’ to the taxes they pay and the public services which these finance. To do this it proposes the greater use of earmarked or ‘hypothecated’ taxes, including a new tax to fund the National Health Service.

    Ha ha ha you think the establishment would want tax in the open ? OK lets hypothecate the whole of income tax for benefits which is about right so everyone knows that every single thing we get from the State is actually stolen via stealth taxes and indirect taxes.
    Your ideas could not stand honesty about tax , thats why the tax system is so complex and so why Conservatives want simplification . If , come to think of it , there had been an honest connection between debt over a cycle and tax levels /services through the New Labour period then There would have been no New Labour .

    It was built on fiscal lie and the tax system the clearer the tax system the more we are customers and the less the state likes it . I love the hypothecation of Public Sector Pension tax, there woukld be a riot

    Oh deary deary me Duncan you are way off beam here and as for hypothecated bonds …. Whatever idf you want clear taxes you are on the wrong side

  9. duncanseconomicblog said, on July 13, 2009 at 8:14 am

    Lots of interesting comments here.

    To be clear, I am not suggesting that we replace all current gilt issuance withy hypothecated bonds. I’m merely suggesting that we could look into issuing one or two a year earmarked for very specific purposes.

    The aim would be to tap private savers into funding stuff that interested them. Obviously the ampounts raised would be small.

    It may well work much better in Local Government.

  10. Jane Pir said, on July 13, 2009 at 10:16 am

    >>I guess one-pound, one-vote could also work.

    One-pound one vote is a good idea when your looking at how to spend money and one person one vote is a godd idea when you are looking at social issues (crime etc). Basically give the stakeholers the say.

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