Why hasn’t the UK had a sovereign wealth fund before now?
It’s some 20 years or so since I first heard about the concept of a sovereign wealth fund (SWF). I was working on a short-term assignment in Kuwait when I came across an article in an English-language newspaper there. My immediate reaction was ¨Has the UK got one?” and if not, “Why not?”
Martin Vander Weyer answered my questions in an article in The Spectator (5 April 2008 – Why hasn’t Britain got a sovereign wealth fund?) The answer was “No. We don’t have one”, and the reason is that the total tax revenues from the North Sea Oil bonanza of the 1970s were used by successive Labour and Conservative governments to keep non-oil taxes lower than they would otherwise have been possible without rising debt levels or sharp cuts in public spending relative to GDP.
Margaret Thatcher’s government chose to use the oil revenues of the 1970s to boost individual wealth but also to pay for three million people to be unemployed. This was in stark contrast to Norway where their government of the day decided to invest a chunk of Norwegian oil revenues in a sovereign wealth fund which now stands at $1,631,411,364,700 – the biggest in the world. China is a close second with $1,350,000,000,000 invested in its China Investment Company and the Kuwait Investment Authority has $98,000,000,000 of assets. And since 2005, at least 40 new SWFs have been created.
Sovereign wealth funds – a definition
But what exactly is a sovereign wealth fund and why is it such a good thing? A sovereign wealth fund is a state-owned investment fund comprised of money generated by the government, sometimes – though not always – derived from a country’s surplus reserves. It is intended to provide a benefit for a country’s economy and its citizens.
There are several types of sovereign wealth fund, but they generally exclude state-owned enterprises in the traditional sense (government-employees’ pension funds funded by employee-employer contributions), and foreign currency reserve assets held by monetary authorities for the balance of payments or monetary policy purposes.
What are the advantages of SWFs?
The biggest advantage of SWFs is that they provide guaranteed capital in case of future funding needs and so reduce economic and financial uncertainty. SWFs have traditionally invested in risk-free instruments such as US bonds since the 1980s. They represent a safety net during difficult times, providing a cushion for a country when other income sources are insufficient. SWFs can be a source of quick funds during emergencies such as the COVID-19 pandemic. They can also fuel growth in times of economic recession.
SWFs make companies more valuable because they reduce firms´ cost of capital as a result of their lower risk premiums. They are also attractive to companies because they contribute to long-term shareholder value.
An additional advantage of an SWF is that it can stabilise a country’s currency by preventing it from becoming too strong or too weak. By buying or selling foreign money an SWF can control the value of a country’s currency and thus keep trade balanced.
SWFs are especially useful in helping governments plan for the future. They save money today to meet future needs such as healthcare, education and development projects. They can attract large investments from domestic and international sources at competitive interest rates because they are guaranteed by a country’s government.
Furthermore, SWFs can be a driver for economic growth by investing in profitable projects. They can boost a country’s economy by creating jobs and developing infrastructure.
The sovereign wealth fund – flagship of a Labour government that wants to boost investment in the UK
On 9 July this year the chancellor of the exchequer, Rachel Reeves, launched a £7.3bn national wealth fund for the UK with the stated aim of investing in national infrastructure project such as ports, giga factories and hydrogen and steel projects. The launch was a key pledge in Labour’s election manifesto. The new SWF has a taskforce of prominent business leaders such as former Bank of England governor Mark Carney, Aviva chief executive Amanda Blanc and Barclays´ chief executive C S Venkatakrishnan who have been providing advice and recommendations since March 2024.
This SWF hasn’t been set up to manage a budget surplus like its Norwegian counterpart, but instead aims to boost investment in key industries, giving investors the confidence to put money into the UK by showing that the government is willing to share the risk of pouring cash into long-term infrastructure projects.
The government plans to use £1.8bn of public funding for ports, £1.5bn for gigafactories (including a contribution to developing electric vehicles), £1bn for carbon capture and £500 billion for green hydrogen.
An additional aim is to attract £3 of private cash for every £1 invested via the SWF. If successful, it would take total investments to around £29bn.
Consolidating national wealth
This SWF will act as a what is known as a ‘concierge service’ for businesses and investors wanting to pour money into the UK.
It won’t be launched from scratch but will lean on the expertise of the three-year-old UK Infrastructure Bank headed by former HSBC executive John Flint. The new SWF also plans to revamp the British Business Board which administered the Covid loan schemes. The BBB has experience in venture capital involving taking stakes in small but growing private companies.
The seed money for this new SWF will come from ‘closing the loopholes’ in the windfall tax on oil and gas companies.
The Treasury has not yet said how much it hopes to make from its investments though the UK Infrastructure Bank’s own targets indicate that it could be in the range 2.5% to 4%.
Reeves has promised to reveal further details in her October budget.
The timing couldn’t be better: the UK´s new SWF will undoubtedly benefit from the headwind provided by growth in GDP. Its launch coincides with recent data that shows the UK as having the highest quarter-on-quarter growth figures of all G7 countries (UK GDP grew in Q1 by 0.7% compared to the US at 0.3% and France and Germany both at 0.2%.
Collective vs individual wealth
So, the UK finally has a sovereign wealth fund, and it is to be hoped that it will build up funds for the benefit of the whole country instead of continuing the short-term economic models pursued by previous successive governments. At last, we have an economic policy which looks to accumulate collective wealth over many years rather than boost the wealth of already mega-rich individuals.
CLICK HERE TO DONATE TO OUR CROWDFUNDER
HELP US BECOME STRONGER SO THAT WE CAN CONTINUE TO DELIVER POWERFUL CITIZEN JOURNALISM!
