The Great Rebalancing: A sovereign wealth fund to make the UK’s economy the strongest in the G20

The decision to leave the European Union creates an opportunity to ask fundamental questions about our future for the first time in 40 years.

In particular, we are historically worse at long-term planning than many other developed nations: we save less, invest less, and build less economically-vital growth-promoting infrastructure (roads, rail, ports etc) than they do. Other oil-rich countries like Norway have built up large sovereign wealth funds, but we have not. Can we resolve these weaknesses, using the spur of our newly-won freedoms to change the way we work once separation from the EU is complete?

These weaknesses are long-term and structurally-ingrained into our economy and our politics, so they will take many years to solve. Governments that always invest heavily in economic infrastructure, balance the budget over the economic cycle, and promote stronger savings and investment across the wider economy, no matter which political party is in power, are not what Britain is used to. We will need new fiscal rules, backed by strong new institutions, to change the way British politicians, Governments, savers and businesspeople behave over the very long term, so financial virtue becomes a reliable, permanent and boringly predictable part of our national finances.

The results should be profound, rebalancing our economy from being heavily dependent on consumer spending to one that reliably generates more investment in growth, underpinning stronger and better public services, insulating us against the next unexpected economic shock whenever it comes along, and enhancing our international heft around the world as well.

The underlying principle which underpins the changes that will be needed to fix our long-term weaknesses is generational justice: the idea that it is unfair to saddle our children and grandchildren with the costs of our current spending. But that is exactly what we are doing if we pay for those costs with long term debt, so there must be fundamental changes to the shape of Government finances:

  • We need to build and invest more in crucial economic infrastructure, and keep doing it consistently and predictably no matter what the short-term economic weather may be, so we match (or beat) other developed economies. We can and should start doing this immediately, because it is the only kind of Government spending which can justifiably be paid for with long term debt. It will inevitably mean a slightly longer wait to eliminate the Government deficit and achieve a balanced budget, but should earn a good financial return through higher economic growth nonetheless.
  • Once the Government’s budget is back in balance, there should be no other long-term borrowings beyond those for building economic infrastructure. Short-term debt should only be used for temporarily smoothing out the effects of periodic recessions (i.e. we would only borrow in a recession, and repay it all in the next expansion, so there’s none left when the next recession strikes).
  • We have inherited very high levels of accumulated national debt, partly as a hangover from the 2008 financial crisis, and partly because the promises we’ve made in our pay-as-you-go pensions and benefits system fail our generational-justice test (they aren’t investment in economic infrastructure, and they create long-term liabilities which are the same as debt). We will have to reduce them through a very long term project (lasting several generations at least) to repay Gilts and create a UK sovereign wealth fund to replace the taxpayer liability underpinning state pensions and benefits.

These changes – particularly the new sovereign wealth fund – would have profound social effects, as well as economic ones. They would affirm British social justice by ensuring we are not saddling our children and grandchildren with the bills for our lifestyle today, through future debt repayments. And the sovereign wealth fund would give low and high-paid taxpayers alike a personal stake in the system which underpins their individual state pension and benefits payments, creating a broad-based, socially-just, asset-owning democracy on a scale even bigger than the one created by Margaret Thatcher’s sales of council housing 30 years ago.

These things won’t happen without very significant changes to the way successive generations of Governments, politicians, savers and businesspeople think and behave. We will need new institutions to lock in the new approach for the very long term, so future Governments can’t abandon the project whenever short-term political pressures are high:

  • A Government target as a % of GDP for Government long-term infrastructure investment, similar to the ones already in place for Overseas Development (0.7% GDP) and NATO (2% GDP).
  • An annual public declaration by the independent Office of Budgetary Responsibility (OBR) of whether the Government is being financially virtuous, to confirm whether the new infrastructure investment target is being followed, and whether the budget is being balanced across the economic cycle so day-to-day public spending is not being financed by long term borrowing.
  • A new National Debt Charge (‘NDC’) carved out of Income Tax to pay the interest on the national debt in the same way as National Insurance Contributions (NICs) pay for the pensions and benefits system at present. It would be set as a % GDP and, as the economy grew, any surplus would be used to begin repaying the National Debt, and to build up a new UK Sovereign Wealth Fund.
  • The Sovereign Wealth Fund will build up over the very long term (several generations at least) to fund the liabilities in our pensions and benefits system. It will have a target date by when the build-up must be complete, and the Bank of England will publish an annual letter confirming whether the NDC is set at the right level to achieve the target. The Fund will be managed through a fully-independent, standalone National Insurance Trust with a heavyweight Board of Trustees equivalent to the Bank of England, to prevent political meddling. It will be subject to the same rules for prudent investments and transparent reporting as every private-sector pension or insurance firm so taxpayers get value for money.

These are very big, long-term solutions for equally big, long-term and ingrained problems. They will need a sustained political, social and financial commitment, over several generations, if they’re to be completed successfully. It is the kind of commitment which parents often make for their own children or grandchildren, to ensure they have a better life than they did. These proposals will do the same for the entire country. We should think big.

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