Rising unemployment: self-managed funds to the rescue

A few advisors to the Coalition cabinet have suddenly woken up to what is really looming for Australia.

They now realise that in the year of the election, 2016, unemployment is likely to sky rocket because of what is happening in mining investment, retail and the motor industry (A tsunami warning for business and executives, February 11).

The brunt on the mining investment fall will be in 2016, although Gina Rinehart’s Roy Hill will help.

Unfortunately the traditional means to solve the problem -- lower interest rates and infrastructure spending -- will not work without a different approach.

Accordingly, new solutions are being devised, but these solutions may be vigorously opposed by vested interests.

The first solution being canvassed is to make submissions to David Murray’s financial system inquiry to change the banking regulations, which currently stipulate that far less capital is required to back bank housing loans than loans to smaller enterprises.

Accordingly, home mortgages are the most profitable way for banks to lend. But jobs are created by small and medium businesses, and they can’t possibly attract major funding while the current capital regulations exist. Of course, as banks will argue, smaller enterprises are also nervous about too much borrowing in the current environment.

Meanwhile, there’s a series of other magnets to attract money to housing, and away from other investment areas, including negative gearing and the new self-managed superannuation fund housing rules. The global financial crisis was created because America made home lending incentives too great compared to other areas of lending. We are a long way from that, but leveling the bank lending playing field in favour of generating employment will be an important discussion point as the big employment storms approach.

Secondly, as so many other countries have found, token interest rates have adverse consequences. Further interest rate reductions will help the currency, but not much else.

Thirdly, in theory infrastructure funding by savers is the obvious way to attract capital away from housing, but infrastructure planning and funding is a mess.

There are vast sums available in the self-managed fund movement from people who want retirement annuities, but the securities are simply not available.

Early in May the detailed blueprint from this month’s ADC Australian Infrastructure Summit (see A new way to fund rail, roads and hospitals, March 17) will be prepared, which will show both state and federal governments how they can lift infrastructure speeding without large amounts of government funds.

And the blueprint will also show that those projects can be well on the way in time for the 2016 federal election.

Currently, infrastructure spending is usually decided by centralised planners and politicians and it often fails because the users of the infrastructure are not part of the decision, so will not willingly pay for it. If local communities can see the benefits of infrastructure and are part of the decision, there is a high likelihood they will pay for it.

At the same time we have self-managed funds in retirement pension mode desperate for the sort of annuity securities that would come from such projects. It's win-win.

Let me explain how the system might work in the city where I live, Melbourne. But in every other capital city or local community, there are similar situations.

In the case of Melbourne, the central planners led by the federal and state governments stipulated that the city needed an east-west road link. They are no doubt right, but the state government has not sold it well, and because there has been no grassroots involvement, it is very unpopular.

What is very popular is a plan to invest in suburban rail infrastructure, which can be shown to benefit all rail travelers. Under the Australian Infrastructure Summit plan, if there really was widespread support among train travelers for the extra rail infrastructure, the rail-traveling community would be prepared to pay a levy on all rail fares, provided the money was specifically dedicated to the project and there would be no leakage to general revenue.

The self-managed funds in Melbourne would be offered long-term listed annuity-style bonds funded by that levy. In an annuity-style security, the interest rate would be inflation linked, and part of the quarterly payments would include repayment of the principal. All the money from the levy would go to the rail project/ annuity income stream, which could then start quickly.

Suddenly retirees would have a reliable income stream that would be inflation-linked, and they would know that they are supporting a project that they believe would benefit the city.

Once the Australian Infrastructure Summit blueprint details how this would work and the politicians say ‘yes’ (the hard part) there will be substantial projects around the country in 2016 and beyond.