The U.K.’s first female Chancellor, Rachel Reeves, last week announced an ambitious plan to boost private sector financing in the British economy. If it succeeds, the plan could reverberate throughout Europe and lead to a significant boost in infrastructure investments. Asset owners are already embracing it.
The initiative, called the National Wealth Fund, is a multi-billion pound strategy designed to support green investments, infrastructure development and tech-oriented venture capital in Great Britain.
The National Wealth Fund is supported by a taskforce that includes notable figures such as former Bank of England Governor Mark Carney, Barclays CEO C.S. Venkatakrishnan, Aviva CEO Dame Amanda Blanc, and other large institutional investors. With this wealth fund, Reeves aims to “invest alongside business” in “new industries of the future” using “non-fiscal levers.”
‘Anchor investor’
The plan has been well-received by institutional investors such as pensions and insurers. At the World Pensions council, which brings together major asset owners and pension investors globally, director-general Nicolas Firzli said the fund will act as an “anchor investor”.
“This will create a multiplier effect for investments in UK venture capital funds and tech startups,” Firzli told Investment Officer. “It will attract co-investors from the sovereign wealth funds of Singapore, Australia, Canada, and the Arabian Gulf. Other European countries, like the Netherlands, Luxembourg, and Ireland, may follow this example.”
Britain’s investment community was already closely involved in preparations for the fund. “At Aviva we are backing the UK and stand ready to invest even more to help boost growth, create jobs and deliver net zero. We need closer working between government and business to make that happen,” said Aviva CEO Blanc in a support statement.
“We welcome the ambition of the government to encourage further institutional investment into UK assets, and mobilise more private capital towards the energy transition,” said Legal & General CEO António Simões.
Inspiration from the US
The British fund draws inspiration from the Inflation Reduction Act (IRA) in the U.S., introduced by President Joe Biden in 2022. The IRA has allocated nearly 900 billion dollars to infrastructure, climate, and energy projects, helping the U.S. economy grow and encouraging European companies to invest in the U.S. IRA is seen as the cornerstone of America’s new economic policy mix.
Modern Supply-side Economics
Both the National Wealth Fund and the IRA exemplify ‘modern supply-side economics’. This approach builds on lessons from past decades and applies them to the current global context of deglobalisation.
In the 1980s, U.S. President Ronald Reagan implemented tax cuts and free-market policies, known as Reaganomics. His traditional supply-side approach fostered economic growth, it also sparked debates about income inequality and federal deficits. Today, the global economy faces other challenges such as deglobalisation, high inflation, political tensions, and the urgent need for infrastructure and energy projects.
The concept of ‘modern’ supply-side economics, also referred to as ‘Bidenomics’, has gained significant traction in the last year. The doctrine was first tabled by U.S. Treasury Secretary Janet Yellen at the World Economic Forum in Davis in 2022. The Institute for Public Policy Research (IPPR) in London published a paper on this in January. IPPR economist Joseph Evans attributed many of today’s economic problems to an overreliance on free-market mechanisms.
No more dictates
“We have learned through experience that heavy-handed central planning through government dictates is not a sustainable economic strategy,” Yellen said in a speech at The Economic Club of New York last month. “But neither is traditional supply-side economics, which ignores the importance of public infrastructure, education and workforce training and government-supported basic research.”
Janet Yellen, on the doctrine of Modern Supply-side Economics, at The Economic Club of New York, June 2024.
“It’s been clear to President Biden and me that our economic strategy cannot be driven by either the public or private sector alone,” Yellen said. The doctrine of “modern supply-side economics requires public interventions to create a supportive environment for business and fuel private sector investments,” she said.
Secure-o-nomics
Yellen’s recently elected British counterpart Rachel Reeves has embraced the same thinking. Speaking earlier at the World Economic Forum in Davos, she emphasised the need for a more secure and resilient economy, which she terms ‘secure-o-nomics.’ “In the U.K., we can’t just spend money to improve supply-side capacity. We need planning reforms to unlock private sector investment in infrastructure,” she said.
Rachel Reeves, on the potential of Modern Supply-side Economics in the U.K., speaking in Davos, January 2024.
For pension funds and other institutional investors, both within and outside the U.K., the National Wealth Fund aims to facilitate long-term capital commitments to infrastructure projects, Firzli of the World Pensions council noted.
“The National Wealth Fund will work in tandem with the pension funds that invest internationally.” He highlighted that pension funds from the Netherlands, Ireland, and Switzerland, countries with significant national pension assets relative to their GDP, have an “untapped competitive advantage” when it comes to mobilising large capital flows for long-term investments such as in venture capital, private equity, infrastructure, and real estate.
“Pension and SWF capital will determine the new wealth of nations,” Firzli said, referring to sovereign wealth funds.
Funding and potential
To kickstart the National Wealth Fund, the new British government announced an additional 7.3 billion pounds (8.7 billion euro) last week to mobilise private investment, adding to existing infrastructure funding pledges totaling 12 billion pounds.
British pension funds collectively held approximately 3,200 billion dollars in assets as of 2023, making them the third-largest pension investors worldwide after Japan (3,400 billion) and the U.S. (35,600 billion). Canada (3,100 billion) and Australia (2,400 billion) complete the top five. The Dutch pensions sector ranks sixth globally with around 1.700 billion in assets as of 2023, according to WTW data.
With the plans a week old, critics have pointed to some challenges. Labour is keen to lay foundations for economic growth at breakneck speed. The new government heavily relies on the private sector, in acknowledgment of tight constraints on the public finances, the Guardian newspaper wrote. After the Tories’ Brexit-era “fuck business” approach, there is obvious latent potential to unlock, the paper commented, advising the government to be realistic on how far this might go.