A national investment fund?

Good morning from New Economy Brief.

It’s no secret that the UK is suffering from an investment gap, consistently ranking lowest in the G7 for private investment and well below average for public investment. In fact, UK investment as a proportion of GDP hasn’t made it above the G7 median since 1990. But in gloomy economic times, investment is exactly what the UK needs. From the US Inflation Reduction Act to the EU’s Green Deal Industrial Plan, governments around the world are realising that investment is the key to boosting growth and stepping up to the challenge of Net Zero. For the moment at least, it seems the UK is getting left behind.

This week’s newsletter explores different methods of state investment, including a new proposal from the Institute for Public Policy Research (IPPR) for a National Investment Fund.

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The current state of affairs. So how does a state actually invest? Before we look at the IPPR’s new proposal, let’s explore some existing mechanisms:

Sovereign wealth funds. These are a relatively recent concept and have grown rapidly since 2008. The International Forum of Sovereign Wealth Funds (a network of more than 30 IMF member countries which have such funds, define sovereign wealth funds (SWFs) as “special purpose investment funds or arrangements that are owned by the general government”. According to the IPPR, SWFs aim to “maximise the long-term returns of a country’s global investments for future current expenditure requirements”. They typically invest in overseas assets, so their main goal is to maximise financial returns, not to support domestic industrial policy. The UK has been called an ‘outlier’ for not yet having a SWF of its own.
State grant funding. Unlike SWFs, state grant funding aims to promote domestic industry, strategically directing investment towards certain industries or activities. It comes in the form of one-off fee transfers, so it does not generate a direct financial return for the state.
State investment banks. If sovereign wealth funds exist at one end of a scale and state grant funding at the other, state investment banks can be found in the middle. While the former aims to improve financial returns and the latter to boost domestic industry, state investment banks (SIBs) seek to balance the two, providing “a reliable, longer-term, and lower-cost source of finance that private counterparts may be unwilling to supply due to a lack of market incentives”.
The UK’s history of state investment banks. According to the IPPR, the UK has never introduced a state investment bank on a comparable scale to other European countries, and the Green Investment Bank, established in 2012 to help finance the green transition, was privatised and sold to Macquarie five years later. In 2021, the UK Infrastructure Bank (UKIB) was established to plug the gap left when the UK lost access to the European Investment Bank after leaving the EU. But this year, the Public Accounts Committee noted that the Bank's impact so far has been limited by the relatively conventional nature of its investments. Of its 10 deals so far, seven were loans and while the other three did involve taking equity directly, instead making investments via equity funds. The committee questioned whether the UKIB is really financing projects that would be too new or risky for the private sector.

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A national investment fund. To plug the UK’s investment gap, the IPPR proposes the establishment of a National Investment Fund (NIF). This would provide finance to help companies expand green manufacturing activities and decarbonise heavy industrial processes. To access investment from the NIF, companies would have to sign up to specific projects aimed at making them more sustainable - for example, investing in net zero manufacturing technologies. The IPPR says the NIF would not be “picking winners” but instead “picking the willing”. It would publicly outline the kinds of economic activity eligible for funding (according to policy priorities), and companies would then draw up project proposals.

Geography. Unlike SWFs, the NIF would only invest domestically. It would also encourage investment in economically weaker areas, as measured with specified economic indicators. All else being equal, a company in less economically prosperous areas would be preferred.
Financing. The NIF would operate through equity financing and equity-convertible loans. Although these would be real investments, intended to make a profit, they would also aim to support industrial policy objectives. In some cases this could mean waiting longer for a project to become economically viable and start generating financial returns.. The NIF’s immediate purpose would be to lower the overall financing costs of long-term investment projects, securing their cost effectiveness in advance.
So, what’s new? The NIF would complement existing public financing institutions, not replace them. It would have similar financial and policy objectives to a traditional state investment bank, but would focus more on industrial strategy less on financial returns on investment, helping steer the economy towards certain objectives. But what would really set NIF apart from a traditional state investment bank is the equity element, which has been dubbed ‘Dragon’s Den investment’. Instead of merely offering loans, the state would become a co-owner of the businesses it invests in.

‍The politics of investment. Following the US Inflation Reduction Act (IRA), how to finance the green transition has been a central political question on both sides of the Atlantic. While Labour’s pledge to invest £28bn a year a part of the Green Prosperity Plan has had its fiscal prudence scrutinised, with Shadow Chancellor Rachel Reeves recently arguing that “economic stability, financial stability, always has to come first”, less attention has been paid to how such investment should be made. Last year Reeves argued for a National Wealth Fund, but there is little detail on how it would operate. As IPPR’s paper shows, this question is almost as important as the scale of investment itself. As an election approaches, it will be interesting to see how political parties propose to close the investment gap, and whether any of them seize on the idea of a NIF as a model that would work for the UK.

Weekly Updates

Paradigm shift

Don’t go for growth. “Putting growth at the center of economic policymaking is a mistake” argues economist Mariana Mazzucato in a new piece for Project Syndicate. Although growth is often seen as economic ‘mission’ in itself (as it is for Labour, who have a mission to make the UK the fastest growing G7 economy), Mazzucato argues that it is a by-product of pursuing other socially and economically useful missions.

‍Investors back Labour’s Green Prosperity Plan. 78 per cent of investors believe that ambitious climate investment, such as Labour’s Green Prosperity Plan, will bring ‘more rewards than risks’ to the UK economy, according to new research from the Labour Climate and Environment Forum.

Fiscal policy

Labour’s inheritance? In a long read for Renewal, Nick Pearce and Gavin Kelly examine the likely economic inheritance of a Labour government and how the situation differs from the last time a Labour government took office. In order to address policy challenges and maintain voter coalitions, they argue Labour should “review the fiscal framework, with the intention of ensuring that high and stable public investment is prioritised.”

Public services

NHS workforce plan. Almost half of all public sector workers will be NHS employees by 2036/7, according to IFS analysis of the NHS workforce plan. The IFS argues that “returning to the NHS’s long-run average funding growth rate could be enough to fund the workforce plan.”

Work

TUC AI taskforce. The TUC is launching a new taskforce to examine the interaction of AI and workers’ rights. It is made up of representatives from unions and academia as well as legal experts and employers, and aims to produce recommendations by next Spring.

Social security

Essentials Guarantee. The Guardian has backed calls for a new ‘essentials guarantee’ for universal credit payments, an idea championed by Joseph Rowntree Foundation and the Trussell Trust. Drawing on new research from the Stop the Squeeze campaign, the paper’s editorial argues this would be popular with voters.

Tax

Millionaires, economists and politicians tell G20 to tax the rich. In an open letter to the G20 before its meeting in Delhi, the group of almost 300 millionaires, economists and politicians say urgent action is needed to prevent extreme wealth “corroding our collective future”. The letter was organised by Patriotic Millionaires, the Institute for Policy Studies, Earth 4 All, Millionaires for Humanity and Oxfam and include signatories such as Brian Eno and Richard Curtis.