Borrow time

Some weeks ago we agreed P&R could use £30m. from the budget reserve for pandemic-related purposes. This is a ‘tea pot’ where funds are squirrelled away at budget time against unforeseen expenditure arising during the course of the year. Then last week we agreed to allow the spending of another £100m. from the ‘core investment reserve’. This is where the old contingency reserve or ‘rainy day fund’ sits now.

So far, you’ll have noticed, no borrowing – just spending our reserves at a rate of knots. Some felt that was all we should do. Deputy Mark Dorey said: ‘It’s raining – time to spend the rainy day fund.’ He had a point. There is quite a lot more dosh in that reserve, and it was designed for emergencies, so why not spend it?

The problem is that the cash in the rainy day fund no longer just sits there on deposit like it did when it was first set up. Understandably, some years ago the treasury said that if they were holding such a significant sum they wanted to put it to work earning a decent return. So it is invested in assets which would need to be sold in order to use all of our savings.

We could have decided to do that. Trouble is the value of those assets has fallen considerably recently and most professional advisors suggest they are likely to recover at least some of those losses in the medium term. So, with borrowing currently historically cheap, it was decided that rather than having a fire sale of our investments, and crystallising recent losses, we would authorise a two- to three-year credit facility of up to £250m.

Two questions arise? Why do we need all of that money? Is it really better to borrow than use what we’ve already got?

We need the money for all sorts of reasons. We have promised financial support to both businesses and individuals to help them survive this crisis and without sufficient liquidity those metaphorical cheques will bounce. That extra spending on business support and welfare will continue for quite a long time and the reduction of normal States revenues will continue for even longer. So higher States outgoings coupled with lower States income points to a need for extra liquidity to tide us over.

Make no mistake, any attempt to bridge that gap by big spending cuts or big tax rises in the next couple of years would prove a disaster. It would take yet more heat out of an economy already in shock and create a downward spiral.

But why borrow instead of liquidising assets? There certainly is an argument the other way. Deputy Dorey invoked the old adage of ‘never borrow to invest’. Normally sensible advice unless you like gambling. If the returns on your investments are lower than the cost of your borrowing you are in trouble.

Of course this wasn’t quite the same. Rather it was borrowing to avoid having to sell investments at a time when most experts regard them as undervalued. But the argument remains. It is a gamble. If the assets in our core investment reserve keep heading south then we are going to look a bit silly for not selling them now to avoid (or more realistically reduce) the need to borrow. Nothing in life is risk-free and that has never been truer than now.

So what about longer-term borrowing – are we going to do that? Probably. That could come about in two ways. Firstly we could eventually decide to convert some of the urgent borrowing we have just agreed to take out into a longer-term arrangement. In fact it is hard to see how we are going to avoid that completely.

We won’t be generating budget surpluses over the next two to three years and even if we decide to use the balance of our rainy day fund, and the uncommitted portion of the previous States bond, I don’t think it will be enough to repay our entire ‘overdraft’, assuming the full £250m. has been used.

Some members did speculate wildly about tapping into the social security funds, or even the States employees’ superannuation fund, but that would be despicable and in the latter case, I think, illegal.

The other part of the decision over long-term borrowing will come when the States has considered a strategy for Guernsey’s economic and social recovery from the current pandemic-induced trauma. Presumably in a bit more detail than the high-level paper to be presented to the States in a few weeks’ time.

Should Guernsey’s government up its spending in order to pump prime the local economy? Should we accelerate our capital programme during a period when private capital investment is likely to be subdued? Having provided financial life support to businesses, should we also intervene to help them bounce back post-lockdown?

More particularly, should the States be doing that even if it means getting the island deeper into debt in the medium term? Should governments ‘speculate to accumulate’ or should they leave that to the private sector? Are we ‘all Keynesians now’? It is going to be a fascinating and polarised debate.

In one way the States has already committed to a modest amount of medium-term borrowing. They have supported in principle the idea of a £50m. bond issue aimed at individual local investors. That has to be a good decision. Of course if we could avoid borrowing altogether then that would be far better but given that looks impossible then far better to borrow from our own community, giving them a chance to invest in their own economic future than simply getting it all from the wholesale money markets.

The concept was overwhelmingly approved but was criticised by some members for two reasons.

The first was that this represented ‘extra’ borrowing. Of course, this is nonsense. It had to be separate from the first tranche of borrowing approved last week, for the simple reason that permission for that facility was strictly limited to a two- to three-year term, which would be too short for a bond aimed at locals.

In reality the existence of such a bond will be fully taken into account by the States when it considers how much, if any, of the short-term facility to convert into longer-term borrowing and whether to agree to a second tranche of longer-term debt. So it is not extra but rather just a part of the mosaic.

The second objection came from Deputy Jennifer Merrett. She argued this bond could be seen as a way of allowing lucky islanders with some spare cash to invest to make a return on that capital at the taxpayers’ expense. What negativity. I have news for my colleague. If the States borrow at all they are going to have to pay interest on that debt to someone. Surely it is a sounder policy to borrow from local people and pay them the interest, which will then be spent in Guernsey, than to pay it to faceless institutional investors from outside the island?

It will now be interesting to see what the prospectus looks like and what the take-up may be.

Finally I suppose I should touch briefly on the progress of the Covid-19 outbreak in Guernsey before I close.

It seems to be good news. The number of active cases has been falling steadily in recent weeks, which gives rise to several questions. Could the virus be effectively eliminated in Guernsey? If so, could island life return to normal? Would that require even stronger travel restrictions to avoid any fresh outbreak? The official line this week seems to be... maybe, but it’s all going to take quite some time.