By: Callum McGoldrick, researcher
Last week the general election brought the change in residency at number 10 that all of us were expecting, but it’s the new occupant of number 11 that has made the biggest policy announcement of the new government so far. On Tuesday, Rachel Reeves, the new Chancellor, announced a plethora of policies aimed at finally bringing real economic growth, something our previous government failed spectacularly on. Some of these new policies sound promising, particularly housing reform, although as always, the devil will be in the details and delivery, as planning reform is anything but a simple fix.
The most interesting of these new proposals is the creation of a new national wealth fund. Especially notable is how warm the welcome was for its announcement by some on the centre-right. The reason for their optimism is understandable, sovereign wealth funds have been a useful tool for multiple countries around the globe with the often cited examples being Singapore, Norway and Saudi Arabia. All of these countries have drastically different circumstances to the UK today though, meaning any comparisons are unhelpful at best and dangerous at worst. In the case of Saudi Arabia and Singapore, both funds operate without the need for transparency that any scheme funded by British taxpayers would likely be subject to. As many have pointed out in recent years, independent bodies don’t tend to remain independent for long before becoming increasingly left wing and activist led, just look at the Bank of England and OFCOM. This would likely exclude the British fund from investing in anything considered controversial such as fossil fuels which are the foundations to both the Norwegian and Saudi’s success.
The first Singaporian wealth fund, Temasek, was founded in 1974, just nine years after Singapore gained independence. At this time, it functioned as a holding company for newly created government assets, meaning that it did not function as the sort of fund many will equate the Chancellor’s announcement with. Additionally, Temasek grew at a time when Singapore was rapidly developing and shifting towards a high-tech economy. Clearly Temasek was not responsible for Singapore’s development or its growing economy, but it does have a net worth of around £230 billion with the ability to invest magnitudes more than the £7.3 billion announced by Reeves, meaning any returns will also pale in comparison.
The Norwegian fund has an even greater net worth at over £1.2 trillion, making it the largest sovereign wealth fund. It works differently than the initial proposition by Reeves too. Rather than solely using taxpayers’ money directly, it invests the surplus revenues of the state owned oil companies which are immensely profitable. For Norway, the fund acts as a long term savings account to fund pensions, not drive economic growth. While there is a desperate need for pension reform in the UK, currently there is an unfunded pension liability of £9 trillion, it does not seem that the proposed British fund will be used for this cause.
The final example often used to support the creation of a British fund is the Saudi Public Investment Fund (PIF). Worth almost £720 billion it too dwarfs the initial announcement of the British fund. Like Singapore it also initially acted as a holding company for state assets, until 2015 when it began expanding to increase Saudi influence around the world. It was at this time that the PIF started to invest in huge multinational corporations such as Uber, Boeing and Facebook, driving the profit side of the fund as well as investments in soft power initiatives by buying Newcastle United and creating LIV golf to rival the PGA. While having vastly more money than the proposed UK scheme, the PIF functions in a very different way, again meaning it is not a guarantee of success for the scheme announced by Reeves.
Having outlined the differences between the most successful existing funds, let’s look at what we know about the new British fund. It will see a merger of the British Business Bank and the UK Infrastructure Bank to invest in ‘industries for the future’, such as green energy. Labour hopes that the £7.3 billion investment from the Government will attract a further £22 billion from the private sector, facilitated by the new task force led by the former governor of the Bank of England, Mark Carney. Given that the announcement is centred around driving growth, it is unlikely that any funds would be invested wisely to see long term gains, such as with the aforementioned funds.
However the biggest problem is the question of why the private sector is not already investing in these areas if they are such good investments. The new fund is not bringing substantially more money than many private investment firms have, nor will it bring more expertise with the City and Canary Wharf having some of the best financial minds on Earth already. This then points to two things. Firstly, the fund will not make the promised returns and Labour quite probably know this. Secondly, the actual purpose of the fund is to pay for Labour’s social policies at arms length. Labour have already hinted at the rise of a technocratic government, outsourcing the roles of ministers to quangos and giving the allure of independence.
In practice the fund will be run by the sorts of people that those on the right complain about in every other supposedly ‘independent’ organisation and be used to support left wing hobby horses. The government has plenty of mechanisms available to make investment more attractive, such as by reforming the tax system and reducing red tape. There is no need for a wealth fund.
