UK Sovereign Wealth Fund

John Penrose 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.

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

As the hon. Gentleman is one of the more assiduous members of his party, he will have seen that the Co-operative party floated in September 2013 this very idea of a UK sovereign wealth fund. Does he see our proposal of turning the Crown Estate into that sovereign wealth fund as an attractive idea?

[John Penrose]

I have not included in my paper any proposal to take existing Government assets and pour them into the sovereign wealth fund, to give it a kick-start. It would be possible, and there are parallels. The previous Chancellor floated the idea of a regional shale gas sovereign wealth fund, based on the proceeds from fracking. A number of Government assets could be added to any sovereign wealth fund, though in my paper, I do not propose that they should be, but there are respectable parallels. For example, the Norwegian sovereign wealth fund is based on the proceeds of its North sea oil. That is certainly an option to consider. I am not proposing it here, but it is certainly not beyond the bounds of possibility. There are very respectable parallels and antecedents elsewhere in the world.

We need a sovereign wealth fund to pay for what we owe in our pensions and benefits system. It would give the scheme the same strong financial foundations as other occupational pension schemes in the UK for the first time in our country’s history. Like those other schemes, it should be managed through a fully independent board—in this case, a new stand-alone national insurance trust with a heavyweight board of trustees, like that of the Bank of England, to prevent political meddling.

Building the fund is rather like repaying a mortgage or saving for a pension: we have to put a little aside every month for a very long time. We would start by creating a new national debt charge, carved out of income tax, to pay the interest on the national debt, currently projected to be just over 2% of GDP by 2021. It would be set as a percentage of GDP and, as the economy grew, any surplus would be used to build up the fund. The process needs to take a long time—several generations—so that the costs do not all fall unfairly on current taxpayers. It is urgent too, because we need to start soon. There will be a brief moment, when the Government’s budget reaches balance in the next Parliament, when we could set the fund up, but old, bad habits die hard. As soon as there is a hint, a sniff, of a surplus, there will be dozens—hundreds—of proposals for tax cuts or extra spending from both sides of the House. Many of them will be excellent ideas, but we must ensure that we do not miss the golden opportunity to set the fund up at that moment, when we can, before it is too late and any surplus money is earmarked for other things.

We must ensure that all the effort and sacrifice of getting the budget in balance is not wasted. A balanced budget cannot be just a one-off episode of fiscal sobriety, in which our rock ’n’ roll economy detoxes for a few months before hitting the party scene again. We need a long-term commitment to clean living—to the fundamental rebalancing of our economy that the sovereign wealth fund would deliver.

Creating the fund would rebalance our economy; build stronger foundations, so that we invest more for the long term; deliver faster growth and extra jobs, so that we could afford stronger and better public services; insulate us against the next economic shock, such as the latest banking crisis; make us less dependent on foreign investors once Brexit is complete; build our international heft around the world; and answer some of those fundamental questions about the kind of country that we want to be after we leave the EU.

[Mr Gregory Campbell (East Londonderry) (DUP)]

I congratulate the hon. Gentleman on his choice of debate. I agree with him about the long-term thinking that will be required to create a sovereign wealth fund. Does he agree with me that successive Governments need to commit to the promotion of a wealth fund? Then the beneficiaries throughout the United Kingdom will support it, because they will see tangible benefits accruing from it.

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[Simon Kirby]

I often say as an MP—I suppose the same is true as a Minister—that it would be nice to have a crystal ball, a magic wand and a time machine. We are where we are, and we have to make the best decisions going forward—rather than looking back in anger, if I may quote the hon. Member for Harrow West (Mr Thomas).

The additional capital will take public sector net investment to over 4% of GDP for the rest of this Parliament, well above the average of the last 30 years; in real terms, it has been more than 50% higher on average this decade than it was under the whole period of the previous Government.

Another aspect of my hon. Friend’s excellent paper was the suggestion that a new national debt charge be carved out of income tax to help pay down the debt. He will know how much I share his conviction that we need to get debt falling, but I know he also shares the Government’s commitment to helping people who are just about managing. It is important that we build an economy that works for everyone. That is why we would not look to deliver a new income tax charge in our current position. Indeed, as part of the tax lock, we have legislated not to increase the main rates of income tax, national insurance contributions and VAT during this Parliament. Alongside that, we have prioritised an approach to taxation that supports working people, such as our increase in the tax-free personal allowance.

[John Penrose]

Just to ensure that we are all clear, I clarify that my paper supports what the Minister is describing. The proposal in my paper is that the national debt charge would not start until the budget was in balance and would only equal what we were already going to be paying in debt interest to begin with. I reassure him that I am not suggesting an undercutting or a swerving away from the fiscal rules announced in the autumn statement. Those are essential to get us to the point where the budget is in balance, as he is ably laying out at the moment.

[Simon Kirby]

I thank my hon. Friend for again demonstrating what a sensible person he is.

The hon. Member for Ross, Skye and Lochaber (Ian Blackford) asked about North sea oil and why we did not create a fund in the past. He knows full well that successive Governments made use of the revenue from North sea oil to support public finances in the years when the revenues rose. I can tell him that going forward from April 2017, his Scottish Government will have the powers to contribute to their own reserve fund if they so wish. Perhaps that is something they might consider. We all agree that investment in infrastructure is key to growing the economy. That is why the extra £23.7 billion announced in the autumn statement is important; it takes the total we are spending to £170 billion during this Parliament. That will improve productivity, increase living standards and be an essential part of our plan going forward.

--- Later in debate ---

[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.

[John Penrose]

The Minister is being generous. I want to pick up on the point he has now made twice: about prioritising the reduction of the overall level of Government debt in the economy once we have eliminated the deficit. I completely applaud that, but does he accept in return that the debt denominated as gilts or as bonds is only part of the overall picture of liabilities that the Government and successive Government have loaded up? A large proportion of the total liabilities—a larger proportion than the actual debt denominated as bonds—is embedded in the state pensions and benefits system. It would be a mistake for any of us to ignore those liabilities. They are equivalent to debt, so at some point we need to face up to the costs that they include, as well as to the ones he is rightly pointing out with the bonds themselves.

[Simon Kirby]

I thank my hon. Friend for that point, and I accept that the debt is made up of a variety of different things.

I commend my hon. Friend once again for securing the debate, which has been interesting. We have discussed some significant issues for the British economy. There are many areas where he and I are in full agreement, but in closing, I would like to highlight three key aspects.

First, rebalancing our economy is necessary and important. Secondly, dealing with the deficit and getting debt falling is necessary but not sufficient to rebalance the economy. A dynamic and strong economy where growth is shared across all parts of the UK is what we need. Thirdly, on the effectiveness of sovereign wealth funds in various countries, I must repeat our conviction that setting one up is not appropriate for the UK at this point in time when our priority is to get debt falling.

Indeed, as my hon. Friend the Member for Weston-super-Mare notes in his paper, there is little point in attempting to build up such a fund when debt is at

“its current, historically high levels.”

I share my hon. Friend’s desire to live within our means —the hon. Member for Strangford used the expression “to cut our cloth accordingly”—and to secure our public finances, to get debt falling and to invest sensibly in our future success, which are all important areas that represent core priorities for the Government. Those priorities were reflected in the approach that we outlined in last month’s autumn statement: to build an economy that works for everyone.

[John Penrose]

What a splendid debate. There is a high degree of consensus among all parties, with a few isolated islands holding out against the principle. Much of the debate has been about how we might set up a fund, the competing mechanisms that we might use to build it up, and when we should have started, but there has been widespread agreement that, in principle, such a fund is desirable. Scottish National party Members say they are in favour of the principle of a sovereign wealth fund, but they argued that we should have started it earlier and built it up from oil. None the less, they were in favour.

The voice of Northern Ireland agreed. The hon. Member for Strangford (Jim Shannon) said he was brought up to save for a rainy day, as were we all, and he is absolutely right. The hon. Member for Harrow West (Mr Thomas) brought up the Co-op party’s suggestion—similar but not identical to mine—which was helpful.

Although the hon. Member for Stalybridge and Hyde (Jonathan Reynolds) was kind about my paper, I am not sure that the Labour party and I are at the same point on generational justice; it puts less weight on it than I do, although I reassure him that the fluctuations in the fund that he is worried about need not be fatal, but that is for a longer conversation on another occasion.

The Minister was very helpful in accepting the three questions that I asked. On the need for rebalancing, he was clear about the desirability of making our economy more robust and more sustainable. Is debt repayment sufficient on its own, or do we have to take into account our broader liabilities, to rebalance the economy? The answer to the latter is yes, and the Minister was clear about that. He left the door temptingly open on whether this proposal is the right answer. He was generous in his acknowledgement of the strengths and benefits of sovereign wealth funds around the world. He rightly says, as my proposal acknowledges, that it would be wrong to start such a thing now. He leaves the door temptingly ajar, so that it might be something we should consider in future, but I understand that he cannot commit Her Majesty’s Government to this at this point. However, that gives us plenty of opportunity, on a cross-party basis, to come back to this and make sure that that chink of light is brought into full focus.

Question put and agreed to.

Resolved,

That this House has considered the UK Sovereign Wealth Fund .