Gilts offer answer to save/spend dilemma

Wednesday, 03 December 2008 08:02

The UK faces a crossroads, where government stimulus plans are based on increases in spending, but faced with a recession Brits are wanting to consolidate and save.

It is claimed government bonds, gilts, could square this circle.

Dr Stephen Barber, head of research at online broker Selftrade, said: "Here's the dilemma - the 'your country needs you' approach directs that we should all consume in the short-term to stimulate a return to economic growth but while this might be in the greater good, uncertainty over jobs, house prices and mortgages not to mention tax hikes on the horizon mean that for most individuals, the sensible thing to do is to save.

"And yet, if we all save rather than spend the collective will be worse off."

He explained: "However for the consumer faced with this dilemma, consuming Gilts makes sense: it will play its part in economic activity; it supplies the capital for increased public spending; and it offers good potential returns for those facing increased taxes in the future.

"And don't forget, capital gains on gilts are tax free."

"Gilts are easy to access and at the moment they are looking attractive and they are safe," said Dr Barber.

"The chancellor will have to issue a lot of Gilts in the aftermath of pre-Budget report and his spending plans."£

He added gilts were also gaining interest as along with their safety - no UK government has ever defaulted on its bonds - there are liquid and tradable.

Also with inflation low the fixed return is becoming more attractive, and when interest rates fall, as they are doing, bonds rise in value.

"Bonds are a small part of our business, but we are seeing a substantial shift to gilts," he said.

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