- Conservatives are ideologically reluctant to force pension funds to invest in UK assets
- Assuming Rachel Reeves enters at number 11, she faces a difficult task
- Reeves would have to incentivize funds to invest for the benefit of members
Tough choices: If Rachel Reeves becomes chancellor, she will have to repair the damage done by Gordon Brown
Assuming Rachel Reeves steps into Number 11 this week, the UK’s first female chancellor will face a task as difficult, if not more so, than most of her male predecessors.
Its first budget is likely to be in October or November, to give the independent Office for Budget Responsibility (OBR) time to prepare its report.
It could be sooner (the OBR offered to produce a quick version for Liz Truss before her ill-fated mini-Budget, but was rejected) and the rest is history.
The outlook for Reeves is extremely difficult. She and Starmer are banking, Pollyanna-style, on growth to meet debt targets without raising taxes further or cutting public services.
The other option is to go deeper into debt. However, it is worth remembering how much the national debt has grown since the financial crisis and then the COVID-19 pandemic.
In 2007, it stood at £350bn, or just over a third of the economy. That seemed like a lot at the time, but it pales in comparison to the current debt mountain of £2.7tn, or close to 100 per cent of GDP.
Sources close to the Labor Party have suggested to me that in government Starmer and Reeves want to address the problem of “economic inactivity”.
There are a staggering 9.4 million people who are not working but are not officially registered as unemployed, including more than 2.8 million who claim to be long-term ill.
This is a drag on the economy. The Conservatives have refused to take strong action to encourage people to find work again, perhaps for fear of being seen as the unsavory party. Labor politicians, knowing the anger many working-class voters feel at this situation, may paradoxically have fewer scruples.
Large-scale investments are needed to improve our desperately inadequate infrastructure, including transport, energy and water, which in turn should boost productivity.
According to former Legal & General boss Sir Nigel Wilson, who has been a forceful speaker on the pre-election circuit, we need to invest an extra £1 trillion over the next decade for the UK economy to grow between 2 and 3 per cent. in real terms.
Fortunately, there is plenty of capital floating around that could be channeled into more productive use – around £6trn in pension funds, ISAs and other investments.
Most of this hoard of capital is not invested beneficially in the UK, either for individual savers or for the country as a whole, as the tax and regulatory systems do not favor the domestic market. Instead, UK pension funds are investing increasing amounts in foreign stocks.
There is no easy solution, but there are some simple measures Reeves could take, such as removing stamp duty on share purchases, which would revitalize the London stock market.
It could also ensure that Jeremy Hunt’s plans for the Great British ISA, with an additional £5,000 tax-saving limit on UK shares, actually come to fruition.
The Conservatives are ideologically reluctant to force pension funds to invest in UK assets. This free-market purism defies common sense as capital leaves the country. Given the £70bn or so of tax breaks for pension savings each year, it is not unreasonable to ask them to invest more in the UK in return.
Much of the blame lies with Gordon Brown and his tax crackdown on pension funds. It is up to Reeves to repair the damage and incentivise them to invest for the benefit of current pension savers and future generations.