$10 billion in bonds to kill two birds with one stone
We have a remarkable confluence of disasters.
Not only have individuals suffered massive losses from the recent floods - partly because of the lack of an effective insurance market - but so has the community at large.
Massive amounts of infrastructure - roads, bridges, rail and so on - have been damaged by the floods and the government is faced with paying billions of dollars to repair and replace this infrastructure. Although local and state government will need to take responsibility for this, the funding will mostly come from the Commonwealth Government.
Against this background, Prime Minister Julia Gillard has indicated that a flood levy would be one option to fund the rebuilding costs while ensuring a budget surplus in 2012-13.
Given that this infrastructure will benefit the community over many years and may be for such significant amounts it would make much more financial sense to also fund it over many years. A short-term levy is just an additional tax and it would come at a time when large parts of the Australian community are suffering their own personal losses from the floods.
The way governments fund such long-term infrastructure is through borrowing with repayment from future revenues, as they support growth and prosperity in the community. Just because these are capital costs and the budget treats them as expenses does not mean we have to fund them as short-term expenses.
Now here comes the remarkable confluence of disasters. Australia is one of many countries that has an ageing population with individuals living longer than ever before and with an increasing potential call on the Commonwealth budget for health and age pension costs.
Most Australians have been providing for their retirement through a compulsory superannuation guarantee. However, the insurance industry does not provide much in the way of products that provide longevity insurance – protection against the risk of living too long, running out of personal financial resources and the relying on the aged pension.
The risk of too any Australians ending up on the aged pension in 30 to 50 years’ time is a slowly developing and long-term potential disaster for individuals and for the Commonwealth budget. It’s not sudden like the flood losses - but it will have a major financial impact and needs to be acted on immediately.
It’s too easy to say it’s so far off it’s probably not something to worry about - just like we think after recent events that the next major disaster must be so far off that we can relax. They did say this was a one in 100-year or even one in 200-year event, didn’t they? So we have a 100 or so years to wait? We all know what is wrong with that logic.
One of the ways that the insurance industry has indicated that the government could support the development of a longevity insurance market is to issue more long-term inflation indexed securities and even to issue long-term inflation linked longevity bonds. The Henry Tax Review discussed these options in some detail.
An ideal way of funding infrastructure is to use inflation indexed bonds. These could even be long-term inflation linked longevity bonds. The case for government issuing longevity bonds has been made by many. These bonds were used to fund government expenditures in Europe in the 1600s. They are not really new.
By issuing these bonds the private insurance market will be better placed to offer longevity insurance products for Australians reaching retirement and thus mitigating the risk of increasing numbers of older aged Australians relying on the aged pension.
So, with the need to fund increased infrastructure expenses and an insurance industry calling for the issuance of inflation linked and longevity bonds by the government to allow the insurance industry to mitigate a potential financial risk of the government, it looks like this may be a remarkable confluence of disasters.
It would make sense for the government to consider issuing $10 billion in these bonds, to kill two birds with one stone.
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