A British sovereign wealth fund is hardly a new concept in British politics. In 2014 Lord Hodgson argued that the government could launch a wealth fund with the proceeds from fracking. It received a degree of support from then Chancellor George Osborne, but progress since then has been, as Hodgson put it, ‘glacial’. Labour’s John McDonnell has also flirted with the idea, calling for a fund in conjunction with a national investment bank – part of his fabled ‘entrepreneurial state’.
Last November, Conservative MP John Penrose became the latest advocate. Through a paper published by the Social Market Foundation (SMF), he began his own campaign for a British sovereign wealth fund. ‘The Great Restructuring: A Sovereign wealth fund to make the UK’s economy the strongest in the G20’ calls for the introduction of such a fund as a matter not only of sound investment, but generational justice. Penrose writes that it is ‘unfair to saddle our children and grandchildren with the costs of our current spending’. Therefore, he suggests a wealth fund, built up over several decades, to eventually supersede the taxpayer liability on state pensions and benefits.
It also seems to make up for what Penrose regards as a lost opportunity with North Sea oil. ‘Other oil rich countries like Norway have built up large sovereign wealth funds, but we have not’, he adds ruefully. That seems understandable. Writing in 2008, Martin Vander Weyer noted that if all the oil tax had been set aside and invested in government bonds ‘it might now amount to some £450 billion’.
There are good things to say about Penrose’s plan. For one, the proposed system suggests an independent management team of financial professionals, rather than a collection of civil servants trying to pick winners and creating losers. There would also be a ‘heavyweight’ Board of Trustees equivalent to the Bank of England, in order to prevent the operation from deteriorating into a political football. Moreover, a solid template already exists in the New Zealand Superannuation Fund, which is designed to help fund the cost for pensions in a country with an ageing population.
But another aspect deserves closer scrutiny. The SMF paper argues that a wealth fund ought to be managed to increase spending on infrastructure, and that the government should legislate to achieve this – by slapping on a target of a percentage of GDP for infrastructure investment. Penrose offered the 0.7% target of annual GDP earmarked for overseas development, and the 2% target for contributions to NATO, as good examples to follow.
Unfortunately, to meet such a demand we could end up throwing money at dubious projects. The foreign aid target has itself attracted criticism for this reason, most recently for a programme to tackle climate change in Africa that has produced very little since inception. There is a misconception at the heart of the infrastructure argument: that because the UK government spends less on this than other countries with similar sized economies that must mean we aren’t investing enough.
But the reason the UK spends less is because private investment helps meet some of the cost – the UK being a more popular destination for foreign infrastructural investment than France or Germany. Heathrow Airport’s runway expansion, which finally secured government backing in October last year, is one example; with the world of private finance keen to get involved. One of Heathrow’s major shareholders, the Universities Superannuation Scheme (USS), a pension fund, previously expressed a commitment to invest up to £16 billion alongside its partners. Heathrow has now confirmed it will not need assistance from the British government to deliver expansion.
The benefit of attracting private funds to invest in key infrastructural projects is that the taxpayer takes less of a hit than they otherwise would have. Consider High Speed 2, where private sector involvement has been minimal. Estimated costs have continued to increase, rising to more than £55 billion by November 2015. An arbitrary spending target of, say, 0.7% of GDP, would only make things worse – by incentivising the government to spend unnecessarily to meet the commitment. Furthermore, Penrose admits an increase in state borrowing would likely be required, though he insists it should be for the ‘short-term’ only. That forces the following question: how long is short-term?
The obvious rebuttal to this point is that eventually it won’t matter, because new infrastructure will be less of a financial drag thanks to the surplus generated by the wealth fund overall. However, it is also possible that the capital earned from investments and splashed out on infrastructure would not go as far as initially hoped, owing to the additional costs that effect a public project once it gets going. Such a burden may pressure the state to continue borrowing to finish the projects it has already started.
Those add-ons include not only what is wasted on exhaustive consultation processes, but lobbying and delaying techniques, fighting the inevitable legal challenges, and providing compensation to the adversely affected. All this ‘adds up to great costs even before anyone gets on a digger or pours any concrete’. That leaves less to cover future obligations of state pensions and benefits – what Penrose implied was the main reason for having a British sovereign wealth fund in the first place.
With all this in mind, it might be more efficient to remove the shackles of investing x amount of money on infrastructure, and allow a British fund (if one ever does come to fruition), to follow the simpler path laid down by the government of New Zealand.