If you want to invest in Britain’s economy, but you have no idea how to go about it, you are not alone. Business leaders don’t know how either. And government officials stare at each other, unable to devise ways to promote investments that they can persuade ministers come at minimal cost and will win votes.
After more than a decade of procrastination, and the failure of the levelling up agenda, there is an urgency behind demands for the UK to begin repairing what it has and building new things that allows us all – and not just a wealthy few – to participate in the best the 21st century has to offer, from better healthcare to climate-friendly transport.
The chancellor smelled free money when it was suggested to him that pension funds could be tapped as a source of investment. What better than to get a financial transfusion from the £2tn to £3tn sitting in UK retirement funds, he said in the budget back in March. The economy would wake up with renewed vigour and purpose – and, even better, at zero cost to the Treasury.
Jeremy Hunt gave an update in his Mansion House speech earlier this month about how much extra funding he expected from pension funds.
Incremental is probably the best word to describe his plan. He said nine of the UK’s largest pension providers had committed to allocate at least 5% of their default funds to buying shares in private companies by 2030.
To say his backbenchers were underwhelmed understates the disappointment. And critics asked why he was promoting investment in private equity. Surely that enriched a small group of executives, not UK plc?
Without pension cash to fund investment in the short term, Hunt looks a bit desperate. Where can he turn for the megafunds he needs to put in place the infrastructure that supports sustainable growth?
His situation is often compared with that enjoyed by the US treasury secretary, Janet Yellen, who is overseeing a $369bn injection into the economy courtesy of Joe Biden’s Inflation Reduction Act (IRA).
Given the green light by Congress in 2022, the IRA aims to spur investment in green technology via a multitude of grants, loans and tax credits to public and private entities. Controversially, tax credits given out to green industries are conditional on production and final assembly being based in the US. It’s a form of protectionism via state aid that many on the left urge Keir Starmer to adopt and some Tories want Hunt to consider. EU leaders are eyeing the IRA with a view to adopting something similar, putting even more pressure on Britain.
However, the cost is prohibitive and many economists believe that without “good design” much of the money gets panhandled by businesses who make big promises and deliver little other than big pay cheques for themselves (private equity bosses come to mind).
Adam Posen, president of the Peterson Institute in Washington, is a major critic of the IRA, arguing that protectionism, however well intentioned, will make the US poorer. Referring to the leftists urging Starmer to boost commitments to investment spending, he told the Financial Times that Labour had already gone too far.
“You’ve got people throughout the west who are falsely claiming that the economic downsides of activist industrial policy are avoidable,” he said. “Once you put narrow government interventions into place, they tend to stick around, expand and get distorted by entrenched special interests.”
Familiar with the political economy of the UK after a stint on the Bank of England’s interest rate setting committee, he added: “That to me is part of the argument against the Biden administration’s economic policy – and the UK Labour party’s current proposals, if we look at Rachel Reeves’s recent speech – they think that over time their programmes are not going to be subject to corruption or engender retaliation from other countries outweighing the benefits. That is mistaken.”
Yet we know that governments have financial power and that this power can propel economies forward if investment incentives are well designed. The IRA is a costly blunderbuss, and the kind of outlay the UK can ill afford when its efficacy is dubious. Few officials in government seem to have the licence to put in the effort to design sophisticated schemes.
Treasury officials often say that the UK’s top-ranked universities will come to the rescue, attracting businesses and high-flying entrepreneurs from across the world without Whitehall moving a muscle. That cannot work when the government seems hell-bent on crushing the higher education sector under a welter of budget cuts and anti-woke rhetoric.
Using pension fund cash seemed like another easy way out of the quagmire. It wasn’t to be. Hunt found that changing 40 years of pension scheme rule-making was too tough. No wonder he is talking up the investments already in the pipeline. More investment is a bridge too far.
