Europe Economy

Investors Should Price in Government Reform: Strategist

Reforming the way governments spend money could unleash a second wave of disinflation that will boost the private sector, according to Nick Carn, global investment strategist at Odey Asset Management.

The restructuring of government budgets in the developed world is not being priced into the economic models because it has never happened before, Carn added.

"It is possible to make some informed guesses. It would be a second disinflationary wave at least comparable to the corporate restructuring which began in the wake of the credit collapse of the early 1990s," he said. 

The disinflationary trend enjoyed by the developed world over the past years has largely been due to falling prices in internationally traded goods and services, but administered prices and those for state-provided services went up, Carn explained.

"There is no good reason why this should have been the case," he told CNBC in an interview.

In the private sector, the need to compete globally has transformed work practices and productivity and to a large extent the public sector has been insulated from this, Carn said.

"Everyone knows that governments do a lot of things that their citizens would be happy for them to stop doing. They do even more things which are, in theory, desirable but do them extremely badly and expensively," Carn said. (Check government bonds data here)

"Everyone knows what food or clothing would be like if it was supplied by the state. Every developed country is on a journey of discovery about the privileges and work practices of their public servants. Their citizens will not like what they see," he said.

A large part of what governments do is simply data processing and industries like retail banking have done similar work far more cost-effectively and more productively for the last 15 years, according to Carn.

Germany's state sector has seen headcount fall by 20 percent but similar productivity gains have not been matched in other developed countries, he added. 

Poor labor productivity in government means there is a lot of spare capacity going to waste that could be put towards more economically beneficial, private sector areas, Carn added.

"If the price of government falls then private sector productivity would be higher," he said.