UK Sovereign Wealth Fund

George Kerevan Excerpts

Wednesday 14th December 2016 Westminster Hall

[John Penrose (Weston-super-Mare) (Con)]

I beg to move,

That this House has considered the UK Sovereign Wealth Fund.

It is good to have you looking after us this morning, Mr Owen. The title and subject of this debate come from a proposal I published recently, with help from the good people at the Social Market Foundation, called “The Great Rebalancing: A sovereign wealth fund to make the UK’s economy the strongest in the G20”. It is available in all good book stores; failing that, the Library refers to it in a good deal of detail in its excellent debate briefing note. For anyone who is sufficiently riveted to want more details, it is available on my website with a slightly pithier summary alongside it, written for The Times’s “Red Box” column.

The reason for writing the proposal was simple. This is a crucial moment for Britain. Brexit creates an inflection point—an opportunity to ask ourselves fundamental questions for the first time in many years about what kind of country we want to be once we leave the European Union. How can we best use the spur of our newly won freedoms to change the way our country works? What do we want our economy, our society, our cities and our countryside to look like? “The Great Rebalancing” is an attempt to answer at least some of those questions.

For years, economists of all kinds, of left and right, have said rightly that Britain is worse at long-term planning than other countries. We save less, invest less and build less economically vital growth-promoting infrastructure, such as roads, railways and ports, than they do. Other oil-rich countries such as Norway have built up large sovereign wealth funds, but we have not. We have a rock ’n’ roll economy that lives for today and depends too much on consumer demand, unlike more sobersided countries such as Germany, which are much better at investing for tomorrow.

The result is that we lag behind the United States, Germany, France and even Italy in productivity. It takes a German worker four days to produce what we Brits make in five, so we work longer hours for lower pay than other countries, and we will not be able to raise our living standards sustainably or to build an economy that works for everyone unless we fix that fundamental underlying issue.

Even worse, we have huge national debt, partly as a hangover from the 2008 financial crisis, but mainly because the promises we have made in our pay-as-you-go pensions and benefits system create long-term liabilities that are, financially, effectively the same as debt. That is not fair to our children and grandchildren, who will have to repay the money we have borrowed. We are handing them the bills for our lifestyle, rather than paying for it ourselves. These are long-term structural problems that are deeply ingrained in our economy and in our politics. They have taken decades to build up, and they will take just as long to solve.

Part of the answer is to invest more in crucial economic infrastructure such as roads, bridges, railways and ports, and to keep doing it consistently and predictably. To my mind, the most important and least noticed bit of the Chancellor’s autumn statement was not the £23 billion investment pledge for innovation and infrastructure, although that was certainly welcome and valuable. It was the instruction to the National Infrastructure Commission to plan for a future where, every year, we spend between 1% and 1.2% of GDP on this stuff, rather than 0.8%, as we do today. That is not a one-off; it is a permanent change that he proposes. It stops the infrastructure boom and bust that we have suffered for decades, in which Governments postpone critical growth-promoting projects whenever money gets tight. Making our investments boringly predictable really matters, because stop-start spending does not only delay growth; if there is not a smooth pipeline of projects, taxpayers get less value for money, and we cannot build as much with the money we have.

But what about that huge national debt? How do we make things fair for our children and grandchildren? First, we have to stop adding to the debt, which means stopping borrowing. The autumn statement said the deficit will be down to 2% by 2020, cyclically adjusted across the business cycle, which is a vital step in the right direction. My proposal goes one step further and asks for an annual public declaration by the independent Office for Budget Responsibility to ensure the Government’s budget stays balanced across the economic cycle in future. That is a small but crucial piece of fiscal rule making.

We gave the OBR responsibility for the financial forecasts to stop Chancellors using fairytale projections to cover up problems when they were under pressure. Once we have finally balanced the budget, sometime during the next Parliament, we should extend that same mechanism a little further, to shine a harsh and unforgiving spotlight on any future Chancellor who is not prepared to live within the country’s means. We have not, after all, endured years of austerity and belt-tightening just to have a future financially irresponsible Chancellor toss it all away.

[George Kerevan (East Lothian) (SNP)]

Does the hon. Gentleman envisage a permanent budget surplus?

[John Penrose]

At this point in my remarks, I envisage a consistently balanced budget across the economic cycle. That would be a major step forward and, given this country’s history since the second world war, it would produce a welcome degree of certainty for businesses, Government and everyone else. I will come on to how we might then build up the sovereign wealth fund; the hon. Gentleman might like to come back at me at that point if he thinks I have not covered the issue properly.

Once we have stopped borrowing, we can start saving, which is the point the hon. Gentleman just made. That is where the sovereign wealth fund comes in. Most of that huge national debt comes from our pay-as-you-go state pension and benefits scheme, so paying off Government bonds—gilts—will not be enough on its own. Even worse, we cannot just grow our way out of trouble, because the pension and benefits scheme’s liabilities will just grow with us. Instead, we need a sovereign wealth fund to pay for what we owe in our pensions and benefits system.

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[John Penrose]

That is a crucial point. As I said, we need to start building the fund soon. It is an urgent priority that we should begin it when the budget hits balance, but once we have begun, we need to save a little for a very long time, and that needs to last over several generations, so that the burden of setting the thing up does not fall unfairly on the current generation of taxpayers. The hon. Gentleman is exactly right: for it to be stable over such a long time, it needs to be politically stable. That means two things. First, I hope that it has cross-party consensus behind it, so that it will have some degree of political longevity; secondly, it will need institutional bulwarks to prevent Chancellors of whichever party, when they are under pressure—facing a general election or a cyclical recession—from interfering, meddling or trying to get their sticky fingers on the money. The hon. Gentleman is absolutely right: the fund will need very strong institutional safeguards around it. Those are laid out in some detail in my paper. I did not plan to go into huge detail about that here. I am happy to, if anyone wants me to, but I thought that I would spare everyone the detail at this stage, simply because of pressure of time and because other hon. Members want to add their thoughts.

If we could do what I propose, we would be a fairer, more generationally just country, because we would not be saddling our children and grandchildren with the bills for our lifestyle. We would be more socially just, because low and high taxpayers would all own the same personal stake in the fund that underpins their state pension and benefit payments.

I hope that all of us in the debate, including my hon. Friend the Minister, will deal with three issues. First, can we all agree that rebalancing our economy is necessary and important? A number of Members have suggested in interventions that there may be consensus on that, but it would be good to get that on the record from hon. Members on both sides of the House if we can. Secondly, can we all acknowledge that once we have the budget in balance, reducing the bits of our national debt that we happen to have issued as Government bonds will not be enough to achieve rebalancing on its own? Thirdly, can we all accept that a sovereign wealth fund to underpin the state pension and benefit system is at least one valid way of solving the deeply ingrained imbalances and problems in our nation’s economy and finances, even if there may be other ways as well?

Think of it: if we can agree on some or all of those issues, cross-party, we could launch a new Britain—a socially just, generationally just, asset-owning democracy on a scale that no other developed nation could match. The post-war Governments created new institutions such as the NHS and the welfare state, which had little relevance to rebuilding homes and cities damaged in the war, but everything to do with forging a new society and nation. The post-Brexit Government is our generation’s chance to do the same—to leave a mark, to mould and weld our fractured society into a new and better shape. This will be a brief political moment in which, if we grasp it without fear, whether we are from the political left or right, we can create a legacy for our children and grandchildren to remember us by with pride, so let us think big and long term, and let us do this together.

[George Kerevan]

There might be broad agreement on what we are discussing, but the hon. Gentleman has premised much of his case on a surplus being run. As I understand it, the three fiscal rules that the new Chancellor has introduced have moved away from the previous budget surplus rule, and nothing in the current fiscal rules says that we will run a permanent surplus.

[John Penrose]

What I propose would take effect once we had got the budget in balance. The Chancellor’s new set of fiscal rules is designed to take us through the next few years before we get the budget in balance, but once we do get it in balance, any Chancellor—as we are talking about the period after the next general election, I hope that it will be the current Chancellor, but I will not prejudge the results of that election—will need to rethink and reset fiscal rules. What I argue, as the hon. Gentleman will have heard, is that there should be a national debt charge, initially just to carve out what we are already committed to paying in terms of interest on the debt, but as the economy grows, that would slowly start to yield a very small surplus, which could be used to pay into the sovereign wealth fund. That is a very long-term process, but we need to start it soon.

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[Mr Gareth Thomas (Harrow West) (Lab/Co-op)]

I apologise to the Front Benchers: because of other commitments, I will have to read their responses to my contribution and others in Hansard.

I want simply to re-emphasise the proposal that the Co-operative party floated some three years ago: that the Crown Estate, which holds some £8.6 billion of land and property, should have changes made to its regulations to allow it to invest overseas and so essentially become the beginning of a sovereign wealth fund. It is appropriate to have a degree of realism about the size of other sovereign wealth funds and, therefore, about the task for a future Government who want to set one up. As others have suggested, one has to start somewhere if one thinks a sovereign wealth fund is a good idea.

For all intents and purposes, the Crown Estate acts like a sovereign wealth fund by investing in property—usually retail centres—and paying the surplus it generates back to the Treasury to help offset the costs of our royal family. We should encourage the Crown Estate to be a little more ambitious by lifting the restriction that says it can invest only in UK assets and by allowing it to invest in assets overseas, as other sovereign wealth funds do. The Crown Estate clearly has a track record of expertise in the retail sector, and one might therefore expect it to continue with that approach. I see no reason for the Crown Estate not being allowed to contemplate, under the Treasury’s watchful eye, investment in similar ventures overseas. The Crown Estate could then hopefully generate sufficient surplus not only to pay for the royal family, but to invest in the types of infrastructure projects that all Members want to see.

The Crown Estate has a comparatively smaller asset base than the funds held by Norway and a number of middle eastern countries. Nevertheless, I see no reason for not advocating a more ambitious strategy, with the hope and aspiration that the Crown Estate might begin to become a sovereign wealth fund. I have had no clear explanation from the Treasury of why it opposes changing the law to lift the restrictions that limit the Crown Estate’s investments to the UK market. I hope that the Minister—if not in this debate, then perhaps by way of letter—will think about that, because if the restriction were lifted, the Crown Estate would begin to act like a sovereign wealth fund.

[George Kerevan]

Does the hon. Gentleman accept that some of the Treasury’s reservations might be overcome if we followed the Norwegian example and had limits for classes of investment that a sovereign wealth fund could make? If we went down the route of investing in foreign equities or bonds, only a proportion of that investment would then qualify for the overall fund.

[Mr Thomas]

That is a helpful suggestion. If the Treasury could be persuaded to allow the Crown Estate to dip its toe in overseas markets, it might initially restrict how and where, and in what type of assets, the Crown Estate invests. The hon. Gentleman, cautious Scot as he clearly is, might wish to encourage the Treasury both to be open-minded about investment overseas and to carefully restrict such investment. I do not oppose such a restriction if it allows the Crown Estate to be a little more imaginative.

With that pithy contribution, I encourage the Minister and my Front-Bench colleague to embrace the Co-op idea with enthusiasm and consider how we might begin a UK sovereign wealth fund.

[George Kerevan (East Lothian) (SNP)]

I begin in time-honoured fashion by thanking the hon. Member for Weston-super-Mare (John Penrose) for securing this debate. I say that genuinely because we do not get enough chance to think long term or to debate issues in detail, and this is a practical issue on which to do so.

This has been a limited debate, and I begin my summing up by agreeing with many of the hon. Gentleman’s reasons for having some kind of sovereign wealth fund. In the current context, the most important reason is that a sovereign wealth fund would provide inter-generational justice. There have been discussions about a UK sovereign wealth fund since the 1970s; the issue has come and gone. There have been many arguments for a sovereign wealth fund and, in the ’70s, the North sea oil money had arrived and we needed to do something sensible with it.

Such reasons are episodic. On both sides of the House, we have all come to understand that inter-generational fairness is an issue. Successive generations have repeatedly used up available funds, often making a mess of the economic situation, and left it to future generations to pick up the pieces, as the Women Against State Pension Inequality Campaign is at the moment.

In the absence of any inter-generational mechanism for creating such fairness, we have to consider some kind of sovereign wealth fund. The Government are on record as seeking some form of inter-generational justice, and this is the only mechanism currently under discussion that has any chance of success. Without prejudging how we do it, a sovereign wealth fund is worthy of discussion because it exactly fits the kind of programme that the Government have suggested.

The hon. Gentleman did not examine in any great detail the other argument for some kind of sovereign wealth fund. During a periodic economic crisis, a sovereign wealth fund, provided we do not touch the capital, would give us an emergency revenue stream that can be put to use without unbalancing the broader fiscal mix. Since 2008, at the same time as building up the equity base of their sovereign wealth fund, the Norwegians have been able to tap some of the income stream temporarily, to offset lower tax revenues as a result of the global economic crisis. Again, that would seem to recommend itself to the Treasury.

[Ian Blackford]

I applaud what Norway has done, but one of the weaknesses of the Norwegian model is that it invests primarily in equities and bonds. If we get this right, there is an opportunity to invest in infrastructure. My hon. Friend is right that we should draw down only on the income streams, but there is a real opportunity to invest in infrastructure to build capacity and growth opportunities, as well as investing in financial assets.

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[George Kerevan]

I could not agree more. I will come on to that, but the Norwegian example is slightly skewed by the fact that Norway is a relatively small country and, when its sovereign wealth fund was being built up, it had an excess of inward investment in the oil industry. Norway therefore did not need to tap the wealth fund for domestic infrastructure expenditure. Norway has also been canny in making significant investment in infrastructure anyway. There is a glaring gap in the UK’s infrastructure investment, and infrastructure would be one of the primary places to secure a positive income stream; it is therefore somewhere we would want to invest.

Just to finish on the Norwegian example, there is never a good time to start a sovereign wealth fund. It is interesting that the Norwegians did not start their wealth fund until the early 1990s, just as oil prices collapsed. They set up a spanking new sovereign wealth fund, and they chose to persevere after oil prices nosedived. Oil revenues built up again during the 1990s and the wealth fund powered away. On whether we should wait and whether there is a right time to start, there is never a right time. The Norwegians started their sovereign wealth fund at the worst possible time for the income streams that they were tapping, namely oil revenues, but they persevered. It is about perseverance and long-term thinking. The hon. Member for Weston-super-Mare made the key point that this works only if we think long term.

We must look at some of the counter-arguments, because as enthusiasts we tend to let our ideas run away with us. The fundamental argument that is always made, especially from the Conservative Benches, is “Why should the Government—or some Government agency, even at arm’s length—keep the revenues and invest them? Surely we should cut taxes and let people spend the money themselves, because they are better judges of how to invest for the long term.” It is a compelling argument, but the trouble is that historical experience does not bear it out: look what happened to North sea oil revenues back in the 1970s.

It has not yet been mentioned today that a prototype sovereign wealth fund, in the shape of the National Enterprise Board, was set up in 1975 by the then Labour Government to invest in domestic infrastructure. As I remember, it had £1 billion a year from North sea oil. It began by building up a portfolio of British industrial companies. There was a Scottish equivalent, the Scottish Development Agency. That was all abolished in 1979 when the Conservative Government came in under Margaret Thatcher. The argument was, “Individuals and private companies are better able to spend the money, so why not cut taxes?”

The 1980s were the decade of maximum inflow of funds from North sea oil. What happened to investment in that decade? Industrial investment fell—indeed, by the end of the 1980s, the UK turned out to be one of the lowest spenders on private industrial investment in the OECD. So it did not go into private sector investment; what about public sector investment? We started the 1980s with something like 2% of GDP being spent in net public investment in infrastructure, which is quite good by today’s standards. By the end of the decade, that had been reduced to something like 0.2% of GDP. There was a catastrophic fall in investment throughout the 1980s. Whatever the huge influx was of funds from North sea oil, it was not passed on in investments.

What about tax cuts? I always like to remind Conservative Members that during the 1980s the share of taxation in GDP did not fall. Yes, Mrs Thatcher cut income tax quite considerably, but she counterbalanced that by increasing VAT. The overall tax burden did not fall, so we have to ask where the North sea oil money—the excess revenue for the Treasury of more than £100 billion in that decade, in contemporary terms––went.

In the first half of the 1980s, there was a very serious recession, from which the economy took 18 quarters to recover and which reduced the Treasury’s overall tax income. Essentially, the Treasury made up the loss from that early-1980s Thatcherite recession by using the North sea oil money. In the end, in the 1980s—the peak years of income from North sea oil—the money was wasted. It did not go into private or public infrastructure investment and it was not used by private individuals to expand their savings; it simply went down the drain.

[John Penrose]

Does the hon. Gentleman agree that there is not necessarily a choice between tax cuts and a sovereign wealth fund? Potentially, depending on pacing, we could do both. In some cases, it might make sense to do both, if only because—as the Government have already said in answer to parliamentary questions—we will need to do something to reduce the country’s overall debt burden. All I am arguing is that we should not ignore the liabilities built up in our state pensions and benefit system as part of that burden. We need to address that and we may also want to make tax cuts, but for different reasons, to do with demand stimulation and so on.

[George Kerevan]

In a spirit of compromise and reaching a consensus that might have an impact on the Treasury, I happily take the hon. Gentleman’s point.

All I am trying to say is that the crude default assumption that taking the money and giving it to individuals or companies will resolve the infrastructure investment problem has historically not proven correct. We come back to the need for some kind of overall public agency that saves and invests. The crude Thatcherite argument, if Members will forgive me for putting it that way, that says “Leave it to the public” is wrong. Short-term pressures on the public and on companies are just as great as those on Governments and Ministers. Somebody somewhere has to create an agency that thinks long term. That is what we are talking about.

[Mr Gareth Thomas]

The hon. Gentleman’s colleague was a bit sniffy about the idea of turning the Crown Estate into such an agency. Could the hon. Gentleman be persuaded to be more positive about the idea?

[George Kerevan]

I am not sure that I recognise that characterisation of my good friend, my hon. Friend the Member for Ross, Skye and Lochaber (Ian Blackford). In case it has never been said on the record before, I will say that he was once my student when I lectured in economics—he is younger than he looks—so everything he knows about economics probably came from me. Anyway, I will come on to the Crown Estate in a minute.

What should we spend the money on? I agree with the hon. Member for Harrow West (Mr Thomas) that the Norwegian example of simply investing in foreign equity is too narrow. Given the primary crisis here in the UK, we should impose an injunction on whatever form of wealth fund we create to invest primarily—not totally, because for safety and balance it should have a remit to spread its portfolio—in infrastructure. The OECD reckons that a baseline of something like 3.5% of GDP should be reinvested in public infrastructure every year to maintain and develop reasonable levels of productivity. In the UK, that investment has fallen to less than 2%. I fully recognise that significant funds for infrastructure investment over the forecast period were announced in the autumn statement, but even so the figure will rise only to about 2.3%, and we need to get up to at least 3.5%, so there is an infrastructure investment gap. The flow of funds could come from a sovereign wealth fund, because above all a sovereign wealth fund can think long term, whereas the City and the financial institutions are being forced to think more and more short term. Again, one of the crucial things we get from a sovereign wealth fund is the ability to think long term rather than just talk about thinking long term.

How would we fund it? I share some of the disquiet about simply linking it to running a budget surplus. Running a budget surplus is extraordinarily difficult; it has rarely been possible to run one over any length of time, in this country or in others. Gordon Brown ran one for a few years at the beginning of the millennium, but it was largely done through artifice because he sold off the gold reserves at rather a bad time. Roy Jenkins, who some Members may be old enough to remember, ran a budget surplus at the end of the 1960s, but only with a hugely draconian austerity programme that actually undercut investment in the long run.

From looking closely at the autumn statement, I do not believe that there is much chance of our running a budget surplus at the end of the forecast period. I certainly agree that we should seek to have a balanced current budget over the medium term, but artificial controls on investment and on borrowing for investment are the wrong way to go. There is no reason not to have quite a healthy borrowing for investment, provided that it is roughly in line with trend growth, because it will make a return. Simply linking the sovereign wealth fund to running a budget surplus is offering a hostage to fortune.

We should therefore look at other sources of funding. The Crown Estate is one—clearly we have assets there that could be deployed. I also remind hon. Members of something that has not yet been mentioned: in the last decade, most of the sovereign wealth funds that have been created, particularly in China, have come from recycling the foreign investment earnings from a trade surplus. It is a bit difficult for the UK, given that we have a trade deficit. Fortunately, in Scotland, where we still have a trade surplus, that surplus would underline the re-creation of our sovereign wealth fund.

Clearly, this is an idea whose time has come and about which there is broad consensus across the parties. It is also an idea that the Treasury has always been reluctant to think about, but that stems from the short-termism of the Treasury. The new Chancellor has suggested that he wants to think longer term. A sovereign wealth fund would be his chance to prove that that is what he is going to do.

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[George Kerevan]

About half of the extra £23 billion that the autumn statement has put into infrastructure investment is going into housing. How does that raise productivity?

[Simon Kirby]

Housing does raise productivity. It is a much-needed part of our economy. People need affordable homes to rent or buy. The building process, as I am sure the hon. Gentleman is aware, creates jobs and increases prosperity and productivity.

The hon. Member for Strangford mentioned a shale fund—a suggestion that others have made, too. The UK does not currently meet the criteria of a country that would benefit from a shale wealth fund: we have a high debt and a large deficit, and we do not have extensive commodity or natural resource exports. The development of the shale industry would leave a positive legacy for local communities and regions where it is based. The Government’s policy is for those communities to be able to choose to invest the funds for the long term. I thank the hon. Gentleman, as ever, for making a very thoughtful contribution that added greatly to the debate. [Official Report, 19 December 2016, Vol. 618, c. 9-10MC.]

The hon. Member for Harrow West apologised for not being able to be present during my speech, and I appreciate that. He asked about lifting investment restrictions on the Crown Estate. That is an interesting idea; I will do as he asked and write back to him on that matter.

I thank the hon. Member for East Lothian (George Kerevan), as ever, for his thoughtful contribution. He mentioned inter-generational fairness. I agree that that is an important issue, but at 90% of GDP next year, our debt is just too high. That represents a burden on future generations, and it is important that we retain our focus on our priority of returning the public finances to balance and getting the debt falling. Therefore, it is not possible, and it would not currently be appropriate, for the UK to set up a sovereign wealth fund. He also mentioned taxation levels; I feel duty-bound to remind him that from tomorrow, for the first time, his party—the SNP—will be able to put up taxes in Scotland. The Scottish Government can put their money where their mouth is, if they choose to do so.