In July 2024, the UK Treasury and Department of Trade and Business began work on the creation of a National Wealth Fund. The September 2024 CfM survey asked the panel whether such a fund will be effective in boosting investment and growth, and whether it is affordable given the UK’s high levels of public debt. Most of the panellists were not confident in the fund’s ability to boost growth. The panel was roughly equally split between those supporting and opposing the creation of a National Wealth Fund, and even supporters of the fund expressed low confidence in its impact and expressed many caveats. However, the panel expressed little concerns about its affordability.
In July of this year, the UK Treasury and Department of Trade and Business began work on the creation of a National Wealth Fund (NWF). It would encompass the current UK Infrastructure Bank and the British Business Bank. The Taskforce will be chaired by the Green Finance Institute and will include former Bank of England Governor Mark Carney, Barclays CEO C.S Venkatakrishnan, and Aviva CEO Dame Amanda Blanc (HM Treasury 2024). The fund is the first indication of Labour’s plans to increase investment towards bringing the UK to a ‘net-zero’ economy and create green jobs. It intends supporting investments in green steel, green hydrogen, industrial decarbonisation, gigafactories, and ports (Barradale 2024). Secretary of Business and Trade Jonathan Reynolds set out his four key priorities for the fund: delivering an industrial strategy which will be the cornerstone of the government’s growth mission; supporting small businesses, communities and the economy; resetting trade relations and championing British exports; and making work pay (Makortoff and Kollewe 2024).
The NWF would not be a sovereign wealth fund like those in Norway or Saudi Arabia; it would not manage cash generated by the government through state-owned natural resources and surpluses from international trade, bank reserves or privatisation projects (Makortoff 2024). Instead, it would serve as a policy bank – a government-owned financial institution that would invest to help deliver government policy and be financed through government borrowing or taxation (Jameson and Howat 2024). The NWF was inspired by similar government-backed schemes such as France’s AFD, Germany’s KTF, and Canada’s CGF (Barradale 2024). The key function of the NWF is not to manage any budget surplus, but rather to boost investment in key industries while giving investors confidence by showing that the government is willing to share the risk of investment into long term infrastructure projects (Makortoff 2024).
Initially, Labour planned to borrow £28 billion (Barradale 2024) to invest in the green economy. That figure was cut in half and almost entirely replaced by the NWF proposal (Barradale 2024). The NWF will be initially funded through a £7.3 billion injection provided by the Treasury (Makortoff 2024) and further capital that would come from “closing the loopholes” in the windfall tax on oil and gas companies. Reeves hopes that this initial number will “unlock” £20 billion in private investment, eventually replacing the initially planned £28 billion (Barradale 2024). The NWF will seek to deploy £1.8 billion of public funding to ports, £1.5 billion for gigafactories (including for electric vehicles), £2.5 billion to clean steel, £1 billion for carbon capture and £500 million to green hydrogen. Nevertheless, the target is to encourage £3 of private investment for every £1 of public investment by the NWF (Makortoff 2024).
According to Labour’s manifesto, closing loopholes on a windfall tax on oil and gas giants will contribute to the NWF at an average rate of £1.5 billion per annum (ICAEW Insights 2024). Regardless of whether this is a realistic target, the fund might divert capital from other public priorities, such as hitting long-missed health service waiting time targets by 2029 or building 1.5 million homes over five years (Bloom and Dawson 2024). Yet, the fund could aid Labour’s green investment goal of decarbonizing electricity by 2030 (Nacvalovaite 2024).
The NWF is said to be an attempt to battle the low investment rates in the UK. The underlying justification would appear to be that firms face limited access to finance. More plausible causes for low investment are Britain’s blocker-friendly planning system, its (recent) reputation for chaotic governance and a lack of expertise with managing big projects, especially in local government contexts (The Economist 2024). Another rationale for the NWF is that it will target investments with large externalities, where the private sector tends to underinvest, and public funds could induce private investment. However, concerns have been raised that the public sector has no greater ability to identify attractive investment opportunities than the private sector. Consequently, the fund has a low chance of making high returns and its purpose seems more as a vehicle to fund government social policies than to generate returns (McGoldrick 2024).
Britain has a long history of state-backed efforts to funnel cash into specialised industries. Some are still running, like the UK Infrastructure Bank or the British Business Bank, which will be pulled under the NWF umbrella. Others are now defunct, such as the UK Green Investment Bank which lost favour and was sold off in 2017 to Macquarie Group. Longer ago, the UK had the 1970s National Enterprise Board, a vehicle that propped up Britain’s manufacturing sector during Harold Wilson’s premiership. The chances of the NWF substantially decarbonising and expanding the British economy do not seem much greater than its predecessors (The Economist 2024).
In the SWF taxonomy, the NWF would be a strategic fund targeting development (non-financial) goals. The largest example of such a fund is Saudi Arabia’s $925 billion Public Investment Fund which aims to support Saudi Vision 2030 – an ambitious industrial strategy to transform the economy away from its dependence on oil and boost the country’s international standing. To avoid becoming a generalist fund, NWF must build strong governance by recruiting staff from outside normal civil service channels, paying competitively and functioning independently in pursuit of its goals. That would mean keeping Ministers at arm’s length from operational decisions (Nangle 2024).
Yet, SWFs are usually built from oil revenues in resource-rich countries, such as Norway and Saudi Arabia. Australia’s Future Fund, in turn, was funded through surplus from privatisations. Meanwhile, the UK has to fund the NWF with debt issuance while having a debt to GDP ratio of nearly 100% (BBC 2024). Yet that approach is not uncommon with France, Italy, and Belgium building their small SWFs each despite high levels of government debt. Moreover, Singapore, China, and New Zealand have created very large SWFs predominantly using debt, without great natural resource windfalls. Therefore, the UK’s dearth of natural resources does not preclude it from creating a wealth fund, rather it just means that the fund will start out small (Nangle 2024).
The structure of the UK’s NWF appears to be a transformation of the UK Infrastructure Bank and the British Business Bank, which makes the fund resemble a national development bank rather than a wealth fund, especially given that the initial £7.3 billion investment will be allocated through the UKIB. Based on a study done on the main development bank in the world – the BNDES in Brazil – development banks can be effective instruments to increase investment, exports, employment and GDP, particularly when borrowers are micro, small and medium-sized companies. The Brazilian experience also suggests that development banks can serve as important tools to fight against climate change, by reducing deforestation for example. On the other hand, evidence indicates that the greatest difficulty for these institutions is generating positive impacts on productivity, an essential variable for economic growth (Barboza 2023).
The September 2024 CfM survey asked the panel whether a National Wealth Fund would be effective in boosting UK’s investment and growth, and whether the fund is affordable given UK’s high levels of public debt.
Question 1: Do you agree that a National Wealth Fund is an effective strategy to increase UK investment and growth?
Nineteen panel members responded to this question. The panel is roughly equally split between those that agree that the NWF is an effective strategy to boost investment and growth, those that disagree and strongly disagree, and those that neither agree or disagree (around 30% for each group). However, supporters and opponents of the NWF differed in both the intensity of and the confidence expressed in their responses. While 10% of the panel strongly disagreed with the effectiveness of an NWF strategy, none strongly agreed. Further, when weighing responses by self-assessed confidence levels, nearly 45% of the panel opposes an NWF, compared to 30% supporting it.
The individual responses further underscore scepticism of the NWF’s effectiveness in boosting investment and growth. Many panellists who selected who supported were neutral towards an NWF expressed concerns.
Costas Milas (University of Liverpool), exemplifies supportive voices for the NWF in the context of low investment rates in the UK, which have been the lowest in the G7 for three years now, at 18.3% of national income in 2024: “(Past) UK governments have tried (or so they say) everything to increase investment and growth so why not try a NWF” (Edser 2024). Other supportive views of the NWF highlight that it is hard to form an opinion when so little is still known about the investment vehicle. Charles Bean (LSE) reflects on the question by analysing two possible paths that the NWF can follow: “If it is successful in catalyzing private investment, then it may turn out to provide a useful boost at the margin. But if it instead ends up being directed to meeting short-term political ends then it is likely to have little positive effect.”
Yet, the majority of the individual responses form a less positive view. Although opting to agree, Jagit Chadha (NIESR) thinks that the NWF will have little impact with its current size and governance: “Even if it exhausts all the funding with the help of the private sector, it will only amount to a one-off increment to GDP of 1%. To allocate the money across many many SMEs will require considerable administrative capabilities, which may prove a challenge for UKIB and BBB” Martin Ellison echoes the opinion: “The ambition and funding of the National Wealth Fund is not enough to make it a game-changer that could move the dial on UK investment and growth. It will also channel its activities through the existing UK Infrastructure Bank and British Business Bank, neither of which has a track record of improving UK-wide productivity on the scale required.”
Moreover, the majority of the panel disagrees with the notion that the NWF could achieve what it is designed to do. Nick Oulton (LSE) is sceptical about the NWF having the desired effect on the green transition: “The NWF is planning to invest in an odd collection of assets – ports, gigafactories, green steel, etc. Apart from ports, these are all vaguely associated with the ‘green transition’. If that is the focus, why is nuclear power not included? It is after all our best hope of reducing carbon emissions at acceptable cost.” Michael McMahon (University of Oxford) comments on the NWF’s institutional structure which makes it more of a development bank: “The Wealth fund is, as noted in the preamble to the questions, a Bank rather than a wealth fund per se. A wealth fund, typically, channels domestic incomes into foreign assets in order to provide a future income stream that is disconnected from domestic developments. Whether a national bank will significantly change investment, and growth depends on the extent to which lack of finance is the source of lower investment by industries […].”
Some panellists view the NWF as a tool to centralise economic policy which in turn is counterproductive to drawing more private investments. Roger Farmer (University of Warwick) strongly disagrees on the NWF’s ability to boost growth: “This is not what I would call a SWF, aka NWF. It is an implementation of what Hayek called ‘the fatal conceit’; the belief that economic policy can be centralised and directed from top down. It is the exact opposite of an effective strategy for growth.”
Question 2: Given its high levels of public debt, can the UK afford a publicly-funded National Wealth Fund in the current parliament?
Nineteen panel members responded to this question. A clear majority of the panel is not concerned about the affordability of the NWF, despite the UK’s high levels of public debt. Over 60% of the panel thinks an NWF is either probably or definitely affordable. Only over 30% of the panel members think that a publicly-funded NWF is either probably or definitely unaffordable in the current parliament. Those believing a NWF is affordable remain the majority when weighing by panellists’ reported self-confidence.
Most panellists argue that the NWF is designed to boost economic growth, and therefore it will have a positive impact on public debt in the long-term. Julama Saeheen (Vanguard Asset Management) comments that: “Affordability needs to be judged on the basis of the longer-term impact of benefits of the fund (net of costs). If the NWF boosts growth, as intended, it will pay for itself.” Similarly, several panellists note that the size of the NWF is not significant enough to raise concern about its impact on public debt. Charles Bean (LSE) summarises this thought: “What is presently envisaged would represent a relatively modest increase in UK public debt and if it constitutes part of a credible and coherent strategy to raise the economy’s potential growth rate, then any consequent upward effect on UK bond yields should be close to negligible.”
Some members refer to historical contexts to support their answers. Some of the panel think that the current level of debt is not as alarming relative to the UK’s historical levels and should not be a major concern when discussing an investment that could boost growth. Martin Ellison (University of Oxford) explains: “The ‘wealth’ of the UK lies not in its natural resources (like Norway and Saudi Arabia) but in its people. Leveraging the government’s ability to borrow at favourable interest rates to invest in the people and infrastructure is then both desirable and possible. There is much talk about debt being high relative to GDP, but that is not true in an historical context – debt was much higher than GDP at the end of the Napoleonic Wars and after World War II. We should learn to worry less about government debt if borrowing is to finance productive infrastructure.” On the other hand, some argue the opposite, using the unsuccessful Italian IRI as a cautious example and claiming that NWF’s burden on government debt will possibly outweigh any small returns that it will bring. Alessandra Bongfiglioli (University of Bergamo and QMUL) expressed her concerns: “This initiative resonates with the Italian IRI, established in 1933 and privatised in 1992 (to be dismantled in the early 2000s) because it weighed too much on public debt. UK public debt is already high and raising concerns of sustainability, even without the NWF. I doubt the proceeds from the above investments would more than compensate the additional burden on the government budget.”
Source : VOXeu
