George Osborne's 5bn gamble to stave off recession
Extra 5bn of capital investment to form centrepiece of national infrastructure programme in chancellor's autumn statement
An extra 5bn of capital investment, funded by spending cuts elsewhere, will form the centrepiece of an overall 30bn national infrastructure programme due to be announced by George Osborne on Tuesday as part of an attempt to prevent the country from sliding back into recession.
The chancellor will unveil nearly 500 public sector projects, many of them to be funded by commercial pension fund investments.
Some of the 5bn extra capital investment over the next three years will go to a 600m schools programme to fund an extra 40,000 places by 2014. In what is rapidly turning into a full scale "game-changer" budget to stave off the impact of collapsing European economies, Osborne will also announce plans to:
Help energy-intensive industries.
Increase the bank levy to maintain an annual income from banks of 2.5bn.
Place a cap on announced rail fare rises.
Defer a 3p rise in fuel duty which was due to be introduced in January
Remove health and safety bureaucracy from 1 million self-employed people as the next stage of labour market deregulation.
He is also expected to announce a deal designed to unlock 40bn of bank lending for small businesses in which the government will underwrite the lending.
The Treasury is disgorging its growth strategy before the autumn statement since it knows the day itself will be dominated by the Office for Budget Responsibility's new forecasts for growth, borrowing, unemployment and their consequences for its goal of eradicating the structural deficit by 2015-16.
Speaking on the BBC's Andrew Marr Show, Osborne admitted the OBR forecasts would be downgraded, saying: "This is an exceptionally difficult time. We have a slowing economy, a slowing world economy, we have this financial crisis brewing in Europe."
But he insisted he would stick to his deficit reduction target, saying:! "I am a bsolutely clear the government will do what it takes to meet its fiscal mandate, to meet its debt target." He has until 2015-16 to meet this target.
With the autumn statement due to be fiscally neutral, Osborne has had to find nearly 8bn in savings to fund the additional 5bn capital investment, as well as the delay in the fuel duty rise and the higher than expected costs of benefit upratings. Some of that will come from lower than projected spending across Whitehall and higher corporate tax receipts, but he is also planning to freeze some working tax credits at the higher income end.
In an attempt to start winning the political argument on the economy, Labour plans to seize on Tuesday's higher projected public sector borrowing figures to claim the government will be borrowing to fund recession through higher welfare bills, while Labour would borrow to fund growth and ultimately higher tax receipts.
Government sources said ministers want to focus resources on protecting the "squeezed middle" and on finding job-creating capital investment in schools, roads, railways, high-speed broadband and energy projects.
The National Infrastructure Plan will draw on 5bn extra capital spending in the current spending period to 2014-15, 5bn extra spending in the following spending period and up to 20bn from a deal struck with pension funds. It will require finding guaranteed income streams for the risk-averse pension funds, such as tolls for new roads, or guaranteed income from power stations.
The government has signed a memorandum of understanding with the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF) to develop a new pension infrastructure platform, and make it easier for pension funds to invest in projects such as renewable energy, power stations and ports.
The scheme is in some ways a substitute for Labour's Private Finance Initiative that the government has declared has provided poor value for taxpayers money.
The National Infrastructure ! Plan wil l set out 40 top priority schemes among a longer list of 500 projects.
Joanne Segars, chief executive of the NAPF, said: "We're excited by the government's commitment to try to make it easier for pension funds to back major infrastructural projects.
"This could be a real win-win. The UK desperately needs to update its infrastructure, and pension funds are looking for inflation-linked, long-term investments.
"Pension funds hold over a trillion pounds in assets, but only around 2% of that is invested in infrastructure. There's the potential for that to be much higher".
Pension fund investment in infrastructure has been pioneered in Canada, Australia and was embraced by the former business secretary Lord Mandelson in 2010.
Osborne hopes to conclude negotiations within the next three or four months.
Ministers have also responded to lobbying from energy-intensive industries about the cost of the government's climate change levy and the European emissions trading scheme. Osborne will announce a 250m package of support, which will include increasing relief from the climate change levy from 65% to 90% in April 2013 for industries that sign agreements with Whitehall to cut their use of carbon.
Osborne refused to be drawn on the latest economic and financial forecasts from the Office for Budget Responsibility, the independent body set up by the chancellor in the aftermath of the last election. However, the OBR is expected to say that the UK will grow by around 1% both this year and in 2012, down from 1.7% and 2.5% in March. Lower growth will result in higher borrowing, but Osborne insisted that sticking to the plans for budget austerity was vital in ensuring that market interest rates in the UK stayed low.
Osborne said that credit easing would involve the government underwriting commercial banks so that they could borrow more cheaply in the financial markets, with the benefits passed on to companies in the form of lower interest rates.
"The government will unde! rwrite t he loans the banks make to small businesses in order to cut the interest rates the small businesses pay," Osborne said. "We are making available 20bn for the national loan guarantee scheme; however, it sits within an envelope that could be as large as 40bn.
"These are guarantees. We are not borrowing this money; we are underwriting the loans that are being made."
It is understood that the second 20bn of loan guarantees is being held in reserve for the moment but could be made available in the next two years.
A third scheme would offer an alternative to traditional bank loans by encouraging firms to sell bonds or company IOUs to the market.
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