One of Labour’s most radical manifesto pledges is the plan to create a national wealth fund. To help drive the green transition and create 600,000 green jobs, the fund aims to raise £3 of private investment for every £1 of government money put in.
The party, however, has dramatically scaled back the public money it plans to put into the fund to £1.5 billion a year, as well as an additional £1.7 billion to fund Great British Energy, a government-owned entity to accelerate the development of green energy.
With other initiatives, Labour’s total yearly green spending commitment is just £4.7 billion. Under its new fiscal rules, Labour plans to fund the bulk of this outlay by borrowing, with £1.2 billion a year coming from a windfall tax on oil and gas companies.
Although relatively small in size, the fund would be a major shift in policy for the UK Treasury, which has been sceptical of the idea of a national wealth fund, especially one funded by borrowing. But the shadow chancellor, Rachel Reeves, has made it clear that she wants to take into account wider measures of public wealth.
National wealth funds come in various guises. Scores of countries have sovereign wealth funds, many set up in the 1970s with revenue from oil production. The largest of these is the Norwegian fund, which has more than US$1.2 trillion (£950 billion) in assets.
Singapore has two huge sovereign funds, heavily invested in high-tech sectors. And Australia used the revenue from the sale of its state-owned telecoms company to set up a fund to improve disability benefits. Even in the United States, the state pension (social security) is fully funded with a trust fund that holds US government bonds worth US$3 trillion.
But these models are fundamentally different from Labour’s proposal. Such state funds accumulate assets for future spending by wise investment. They are long-term investments that capture increases in capital values for the state. By the government putting aside savings now, they aim to future-proof the long-term pressures on government spending from, for example, an ageing population.
For many years Britain has been moving in the opposite direction. In the last 50 years, the publicly owned asset base has been allowed to shrink through the sell-off of public assets to fund current spending.
Britain, unlike Norway, used the revenue from North Sea oil, as well as from the sale of council housing, to fund tax cuts. The inevitable result was a sharp fall in the share of national wealth that is socially owned.
Today the UK is paying a big economic and social price for using vital resources to feed short-term goals. One of the consequences has been to widen the wealth gap.
While the bottom 50% of individuals hold around 6% of all private wealth, the top tenth hold nearly half. And while home ownership accounts for much middle-class wealth, it has declined sharply among the young.
Another serious consequence has been a severe weakening of the UK’s public finances. A study by the IMF of 31 nations has contrasted each country’s public assets with its liabilities (that is, what is owned and what is owed). This shows the UK – with liabilities of £5.5 trillion exceeding its assets of £2.2 trillion – is more than £3 trillion in the red. All governments have been made poorer by privatisation, but the process has gone furthest in the UK.
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By running down public services and the public asset base, successive governments have landed the state with a serious dilemma. They face two priorities. First, an immediate one to find funds to rebuild public services. And then a long-term one, to find funds to boost public wealth in order to fund future spending, build economic strength and ensure greater equity between generations.
A lot depends on how a national wealth fund is financed and invested, and how its gains are distributed. There are number of possible approaches.
Labour has already said it is willing to borrow to establish the fund and has earmarked some tax revenues as well. It could also transfer publicly owned assets, such as state-owned companies, and sell off some government-owned land. Although not as lucrative as the 1980s oil revenues, taxes and charges on energy companies could also be recycled into a fund aimed at accelerating the green transition.
Other sources of funding could include fining companies that damage the environment, taxes on merger and acquisition activity, and a digital services tax on big tech companies like Facebook and Google.
And there are radical ways to draw on the UK’s institutional and corporate wealth. For example, some of the country’s top 100 companies could be required to make a modest annual share issue, of around 0.5% of their existing portfolio, into the fund, up to a total limit of, say, 5%. After a decade, the fund would own 5% of the stock market, so that the benefits of any increase in its value could be more widely shared.
On a small scale, Britain already has examples of how a wealth fund might work. Shetland negotiated with the oil companies to set up a fund whose annual income pays for community facilities and support for the elderly. Another example is the Crown Estate, which manages the monarch’s assets (property, land, mineral rights, and half the UK’s shoreline) for the public good.
Britain is in a big financial hole of its own making, one that has left the next government facing urgent but conflicting priorities. It will be difficult to find the funds for the social reconstruction that is so desperately needed as well as for rebuilding essential state assets and creating a long-term wealth fund. But kicking the second challenge down the road will simply dig a bigger hole. Generation Z and the ones to follow deserve better.