Last week Ireland sold an inflation linked bond worth €609 million euro. The buyers of this bond will get a return of 0.25% for 23 years. As inflation goes up or down the return will follow.
Think about this for a second.
International investors are willing to give Ireland huge sums of money at tiny returns. The funds are secured by nothing more than Ireland’s word – we will pay the coupon and we will return the funds in 23 years’ time.
Now look at our need for infrastructure – housing, hospitals and water systems to name but a few. Each of these is mission critical – in that we absolutely need the infrastructure. The welfare of our society is dependent on it.
Ireland is constrained in what it can borrow due to proper (in my view) rules preventing governments from borrowing recklessly. Governments do borrow recklessly by the way!
But pension funds and other investors can place money into mission critical infrastructure and where the State is involved, even tangentially, the rates will be low. Semi state bodies or local authorities are the State acting at arm’s length.
Imagine an arm of the State (not the State itself) were to borrow money on the markets to put into real infrastructure – social housing for example.
Housing, built properly, will last for 100 years, and more. At current rates the average house (€250,000) at 3.5% would cost the State €730 per month. Taking a family living on social welfare only, the household income will be conservatively €2000 per month. It is generally expected that the family will pay 10% of their household income on rent meaning the overall cost to the State in providing a €250,000 home to that most vulnerable family could be as low as €122 per week.
This situation for the State becomes even more improved by the fact that over decades the property will increase in value so that the State body becomes asset rich meaning more funds to provide more housing. All the while pension funds receive a return on their investment – and if those pension funds are Irish, the benefits are directed into the economy.
The biggest problem we face is ideological, which generally comes from people not willing or able to think beyond a cliché.
As with the water debacle there is a populist view that taxation can pay for everything – even though we know from bitter experience that this is false. Extra taxes cause a drag on the economy and when downturns come – as they do – the money dries up and there is no investment.
But pension funds, endowment funds, insurance funds, and the rest, are looking for homes. Ireland has, if nothing else during the crash, proved that we will pay our debts and so we can borrow at low rates.
These funds provide a huge opportunity to create the infrastructure we need – delivered today and paid over long periods of time.
The so-called vulture funds which, ironically, are financing most of the developments in Dublin today, are monies from ordinary people in far flung parts of the world. We could and should be doing this ourselves.
The harsh reality is that if we continue to be burdened with 19th century thinking we are going to get 19th century infrastructure.
Our thinking needs to change.