A think-tank is calling on the next government to deliver “high quality public investments to crowd in private sector funds” ahead of the UK general election.
Of the G7 group of economies, the UK has had the lowest business investment for three years running, according to analysis by the Institute for Public Policy Research.
But both the Conservative and Labour parties plan to further reduce public investment over the next parliamentary term, the think-tank says, echoing earlier analysis from the Institute for Fiscal Studies.
Public sector net investment is set to decrease to £53.1bn in 2028–29 from £66.6bn in 2024–25, according to the Office for Budget Responsibility’s economic and fiscal outlook, published in March.
The Labour party has pledged an extra £4.7bn a year under its Green Prosperity Plan, although both IPPR and the IFS note that the additional investment would not be enough to offset cuts pencilled in by the current government.
In numbers: Labour’s Green Prosperity Plan
|
Funding (annual average) |
£bn |
Policies funded (annual average) |
£bn |
|
Windfall tax on oil and gas giants |
1.2 |
Great British Energy |
1.7 |
|
National Wealth Fund |
1.5 |
||
|
British Jobs Bonus |
0.3 |
||
|
Warm Homes Plan |
1.1 |
||
|
Barnett consequentials |
0.2 |
||
|
Total |
1.2 |
Total including Barnett consequentials |
4.7 |
|
Borrowing to invest within fiscal rules |
3.5 |
||
|
Source: Labour manifesto |
|||
As part of its Green Prosperity Plan, and acknowledging that investment in the UK is “too low”, Labour has pledged to establish a national wealth fund of £7.3bn during the next parliament, with a remit to support its growth and clean energy objectives.
So what do investors think of Labour’s investment plans?
“The UK in stock market terms has been overlooked. The US has outperformed, people are selling locally, and there’s worries about UK growth,” says Gervais Williams, head of equities at Premier Miton. “So from that point of view I think it’s helpful, at the margin, to bring in some extra investment.
“[Public-private partnerships] are particularly effective when there is less capital coming anyway,” he adds. “So what we’ve seen is capital particularly being withdrawn from the UK market.
“At a time when there’s capital being withdrawn, to have some step-up in terms of new demand is not just helpful, it’s detracting from a negative.”
A national wealth fund would also have a target of attracting £3 of private investment for every £1 of public investment, Labour says. Among other things, the party plans to allocate £1bn towards carbon capture and £500mn towards green hydrogen manufacturing.
Sustainable Development Capital chief executive Jonathan Maxwell warns that a national wealth fund should not be a “subsidy bucket”, but instead should be, potentially, a lead investor in areas of the economy where innovation in business and financial structure is needed.
“The successful outcome of that is the private sector will take it from there. Because if it’s proven to be financially and commercially satisfiable and attractive, then that’s where the capital markets step in, and the business thrives,” he says.
There’s a constant tension between the investment mandate of a sovereign wealth fund… and its overarching policy aims.
Tom Williams, partner and head of energy and infrastructure at Downing, expresses a similar view.
“If you’re investing into something that is of itself currently a sensible, attractive investment for people, which produces an appropriate risk-adjusted return for the kind of capital that is seeking a home, then there is an argument that that capital will find its way to that opportunity anyway,” says Williams.
“Now there might be an inefficient market, and so you might recognise that whilst the underlying opportunities are attractive, perhaps it needs a bit of a spotlight shining on it. Perhaps it needs to grow to scale, and that’s when these kinds of initiatives come in and can be powerful.
“But equally, you generally tend to do these kinds of initiatives when you are trying to stimulate nascent areas, new technologies, existing technologies in new applications, or applications that perhaps haven’t reached commercial scale yet. And at this point, the problem is that those underlying investments may not be, of themselves, sufficiently attractive for a purely financial investor.
“And the problem is then that your one pound of government money may not attract those other three pounds when you turn it into an investment, or the seven pounds when you leverage the asset, because there may not be debt available for those kinds of assets because they’re unproven.
“There’s a constant tension between the definition of the investment mandate of a sovereign wealth fund, or for a particular initiative or vehicle that it’s trying to form in partnership with the private sector, and its overarching policy aims.”
Nevertheless, Williams says he is supportive of a national wealth fund. “It’s a concept that has existed for a very long time in a variety of other jurisdictions.
“The idea of investing today to protect the wealth of a nation tomorrow, and to provide for the future of the country tomorrow, I think is a good one.”
Increasing UK investment from pensions
Besides a national wealth fund, Labour says it will act to increase investment from pension funds in UK markets.
The pledge is similar to the chancellor’s Mansion House reforms for new investment vehicles for pension schemes to support investment into high-growth UK companies.
When it comes to pension schemes, Association of Investment Companies chief executive Richard Stone highlights the issue of engagement. “The use of default funds with vanishingly little allocation to the UK is a significant issue.
“There needs to be a fundamental shift in financial education and a greater understanding by individuals of where their savings are invested; in short, much greater engagement.
“The push for increased disclosure by pension schemes is a start. We would generally be averse to compulsion, not least because of the impact it would have on the role of the pension trustee. Pressure needs to build from investor demand fuelled by better understanding and engagement.”
But Wyn Francis, chief investment officer at Brightwell, an end-to-end service provider for defined benefit schemes, says UK pension schemes are already major investors in the UK.
UK pension funds invest almost £1tn in the UK through a mixture of UK shares, corporate bonds, government debt and other asset classes, according to a paper by the Pensions and Lifetime Savings Association in June 2023.
While their investments need to meet savers’ requirements, the PLSA said pension funds can also act as a source of capital for owning the “right sort” of UK growth assets.
“If the national wealth fund was designed in the right way, there would be interest from the industry,” Francis says. “But structuring something which meets the needs of the whole sector is challenging, as the defined contribution industry naturally has a different risk appetite to the closed, mature DB sector, which is primarily seeking income-generating assets.
“For the national wealth fund to succeed, cross-party support for it is imperative, so investors have confidence it will have longevity beyond one parliament.”
Chloe Cheung is a senior features writer at FT Adviser
