Fulfilling the Promise of a National Wealth Fund
By Ezra Cohen
For many, the week of the 2022 Labour Party Conference will be remembered as the time the tide turned. Depending on your choice of pollster, Labour’s lead is now somewhere between clear blue water and all the water. While that clearly has more to do with the government’s own actions, the Labour Conference was a milestone in its own right for the new policies it produced. Exciting, evidence-based policies like school breakfast clubs are beginning to fill out a vision of how Labour would remake Britain.
Capitalism & Inequality
The announcement of a National Wealth Fund (NWF) may not have stood out among those new policies, but it has the potential to be the most impactful of the lot. The Shadow Chancellor framed the NWF principally as a means of making much-needed investments in British businesses.
Yet a wealth fund could also be a part of Labour’s long-term answer to the existential issue of inequality. At the root of the ever-widening wealth gap is the fundamental problem that the value of homes and shares (capital) has consistently grown faster than salaries. When capital is concentrated in the hands of the wealthiest, stock markets and housing markets outperforming the rest of the economy is a recipe for runaway inequality.
Previous Labour leaderships have wrestled with this problem in different ways. New Labour’s approach was to set up Child Trust Funds, seeded with either £250 or £500 at birth, depending on the child’s background. That policy was one of the first victims of the Coalition’s cuts. By 2019, the Labour leadership had settled on Inclusive Ownership Funds, a plan requiring larger companies to issue shares to their workers so that over time employees would come to own up to 10% of their company.
Whether or not the party returns to those ideas, the NWF offers an opportunity to approach the problem from another angle. The reason capitalism works for the wealthy is not just that they have capital - they also have the means to invest it in large sums over a long period of time. Another institution that happens to have those advantages is the state.
If a government is willing to set funds aside, they can begin to hack capitalism’s code by investing on behalf of every Briton. The UK is one of the relatively few developed countries to have apparently not realised this yet. Wealth funds (more commonly known as sovereign wealth funds) are widespread and can operate in very different ways, as Angela Cummine’s excellent survey of the subject outlines. A little-discussed example on our own islands is the Shetland Charitable Trust, an entity set up in 1976. It invested oil revenues that today disburse more than £10m each year to select charities on the islands. The most impressive precedent comes from, of all places, Republican-run Alaska, which uses its oil fund to pay around $1600 to every resident in the state each year.
While the NWF may have been conceived mainly as a way to support British business, with enough ambition, it could also build up a store of wealth on behalf of every Briton. There is, of course, no contradiction between these aims. Norway’s fund only invests in companies it deems to be operating ethically and acknowledges that restriction reduces the fund’s return by 0.04%. A UK fund would also operate within multiple guidelines, one of which would be that it should invest disproportionately in green, British businesses.
Tackling future challenges
Tackling inequality with policies like the NWF will only become more critical as we move towards a future where technological advances threaten to exacerbate existing inequalities and widen the wealth gap even further.
Technologies like artificial intelligence (AI) threaten to disrupt the job market severely, and those in society with the least will likely experience the worst effects. The positive correlation between median income and expected net employment effects of AI means that low-income earners are threatened much more by AI job displacement than high earners. Moreover, it is lower-paid industry sectors like wholesale, retail, and transport that are expected to suffer net employment reductions due to job displacement from AI (a significant cause for concern given wholesale and retail sectors make up more than 12% of UK employment). Without intervention, the wealthiest will benefit from AI whilst the poorest suffer. State investment on behalf of its citizens is a way to help level the playing field. We need a range of proactive policies to manage the structural risks posed by AI, and the NWF is one way to ensure AI doesn’t prevent us from achieving the socially just future that Britain deserves.
How to Pay For It
The tragedy of it all is that we could be living with a handsome endowment today. The largest fund in the world, Norway’s sovereign wealth fund, was built up with revenues from North Sea oil and gas. Having only started in 1996, today that pot is worth more than $1tn. Yet when the North Sea was divided between seven countries, Norway only received the second largest piece of the pie; the biggest beneficiary was the UK. In its very finite wisdom, the Thatcher government chose to splurge that gift as quickly as it could. At its peak, North Sea gas revenues paid for fully 9.9% of the UK’s budget. The Prime Minister who preached prudence displayed none when it came to our national inheritance. If we had invested the proceeds like our neighbours, we would probably have a fund worth around £500bn today.
That was the first missed opportunity to fund a national endowment, but it was not the last. The period since the 2008 financial crisis has seen government borrowing rates fall to unheard-of levels. At one point, the British government was effectively being paid to borrow money, a unique opportunity to invest on the cheap. This was an opportunity particularly well-suited to the state. Where borrowing to invest may be a risky strategy for the average investor, it is no more than a prudent financial strategy for a government which can borrow at basement rates and invest on timescales of thirty years or longer.
Three successive Conservative governments failed to exploit that opportunity. The government of Liz Truss, although barely outlasting the lifetime of a mayfly, went one better by blowing up the economy, with borrowing rates for a ten-year bond rising from 2.14% on the day Truss entered the final stage of the leadership race to 3.63% on the day she left Downing Street. That makes borrowing to invest a less attractive option.
All that just means the next Labour government will have to be that bit more innovative to fund its NWF. It can be done though. The state still holds bits and pieces like shares in banks which were nationalised in 2008; that could be refashioned as the first piece of a wealth fund. A fascinating piece of British history could also make a contribution. In 1928, an anonymous donor set aside £500,000 with the provision that the funds should be used to pay off the country’s national debt when that became possible. With the debt now having grown to around £2.3tn, this is an increasingly remote prospect. The fund, which has now grown to more than £500m, therefore remains in limbo. Devoting it to a wealth fund would be a worthy use.
The Innovative Answer
These funds would represent a good start, but they are only that; to hit the big time, the NWF will need a consistent source of revenue. The good news is that we can use money the government already spends.
Each year, the British state channels around £8bn into a number of government investment bodies. An illustrative example is Innovate UK, an entity with a mandate to invest in British start-up companies and an annual budget of more than £1bn. The overwhelming majority of Innovate UK’s investments are given to companies on a grant basis, effectively making them giveaways. Of course, the state still sees substantial benefits from the grants in the form of jobs created and higher future tax revenues. Still, the argument for the state taking a stake in the companies in which it invests is as overwhelming as it is intuitive.
A single example illustrates the point. In 2008, a tech start-up called SwiftKey started with a £15,000 grant from Innovate UK, followed by a further £50,000 grant. SwiftKey’s founders have spoken about how important that early investment was, an inspiring example of how the government can facilitate the ultimate win-win by giving a helping hand to a struggling start-up. The company came to employ 160 people, and in 2013 was sold to Microsoft for $250m.
While this was a major success story for the UK economy, the taxpayer’s rewards could have been multiplied if it had made the eminently reasonable request for some equity in return for its investment. In that example, if the government had asked minimally for a 1% stake for its investment, it might have been entitled to £2.5m from the company’s sale, enough to make another 38 investments of equivalent size with money to spare. I have spoken with more recent recipients of Innovate UK funding who similarly said they would have gladly given equity in their company in return for the investment they received.
This is good policy and perfect politics. It is common sense to take a stake in return for our investments. And it is potentially game-changing to use the proceeds of those investments to finance a National Wealth Fund – not just a vehicle for investing in British business, but an endowment for every Briton.
1 ‘Rachel Reeves Shadow Chancellor of the Exchequer Conference Speech’, Labour Party, 26 September 2022
2 ‘Citizens' Wealth: Why (and How) Sovereign Funds Should be Managed by the People for the People’, Angela Cummine, Yale University Press, 2016
3 ‘Investing Responsibly: Norges Bank Investment Management’, Norges Bank, 2020
4 Source: https://www.gov.uk/government/publications/the-potential-impact-of-ai-on-uk-employment-and-the-demand-for-skills
5 Source: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/employmentbyindustryemp13
6 ‘Sustaining wealth: Simulating a sovereign wealth fund for the UK's oil and gas resources, past and future’, Giles Atkinson et al., Energy Policy, Volume 139, April 2020
7 ‘Our Common Wealth: A Citizens’ Wealth Fund for the UK’, IPPR, 2018
8 ‘UKRI budget allocation confirmed’, UKRI, 30 May 2022
9 ‘Keyboard app developer Swiftkey bought by Microsoft’, Innovate UK, 3 February 2016