Chancellor Rachel Reeves’s first Budget set out the government’s pitch to reshape the public finances, while setting the UK on a path towards sustainable growth. The Chancellor placed investment front and centre, with public investment projected to increase by £100bn over the course of the Parliament. A key pillar of this investment programme will be the National Wealth Fund, launched at the International Investment Conference in October ahead of the Autumn Budget. Building on E3G’s latest briefing on the Fund, here we analyse what the government got right and what needs to happen next.
To urgently drive growth, the National Wealth Fund must be transformative in driving investment into the UK’s clean economy. The update to the fiscal rules announced in the Budget, which will count financial assets in fiscal debt calculations, can be a critical enabler.
Under the updated rules, investments made via the Fund through loans or equity stakes will be fiscally neutral. If there is political appetite to do so, this would allow the government to significantly increase investment through the Fund to support its wider growth strategy.
A laser focus on clean industries
The Fund currently has a total capitalisation of £27.8 billion – made up of the UK Infrastructure Bank’s (UKIB) original £22 billion, with an additional £5.8 billion allocated over the course of the current Parliament. While much needed, this figure is insufficient to leverage the UK’s estimated £50bn of annual investment required to reach its net zero targets and is underpowered when compared to other public banks such as KfW in Germany.
With its newfound fiscal headroom, the government must give the Fund the capacity to turbocharge the UK’s pursuit of a high-growth, low-carbon economy.
While the new fiscal rules represent a significant opportunity to power up the Fund, financial capacity must be matched with effective institutional design. When updating the mandate through legislation, the government must ensure that it remains laser focused on the clean industries of the future. The UK’s clean economy grew at 9% last year compared to the flatlining wider economy, with high-growth green sectors delivering jobs across the country.
The Fund’s mandate must support a clean industrial strategy with net zero at its heart. The CBI estimates that clean growth industries could add between £37 billion and £57 billion to UK annual GDP by 2030. Investment in these areas is essential if the UK is to capture the opportunities of the transition and not be left behind by international competitors.
Catalysing investment to deliver jobs, energy security and a resilient future
To deliver on its ambitions to crowd in private investment, the government has set out plans for the Fund to be more catalytic in its approach than UKIB, leveraging a broader range of financial instruments, exploring blended finance solutions and increasing its appetite for risk. This is something E3G called for. A flexible risk tolerance will enable the fund to deliver catalytic investment above and beyond the existing capabilities of UKIB, while retaining the ability to make a return for the taxpayer.
However, the challenge of meeting this new remit should not be underestimated. The new Fund must be able to clearly signal to investors how its launch will be a step change in the UK’s approach to public investment, and not just be a continuation along the same path. While building on UKIB’s existing infrastructure will enable faster deployment of capital, the Fund will need to recruit additional talent and enhance capacity to deliver its higher-risk mandate.
With the Fund set to focus on delivery of catalytic capital, the final design represents a broader opportunity to develop a reshaped public finance infrastructure laser-focused on sustainable growth.
The Fund will need to work hand-in-hand with Great British Energy, which will also be empowered to invest in clean power generation assets. These two institutions, embedded within a full Net Zero Investment Plan, can deliver finance for a comprehensive pipeline of projects, while crowding in private investment.
The transition from UKIB to the National Wealth Fund, along with the renewed commitment to public investment, represents a potentially significant shift in the UK’s approach to growth.
In the coming months, the Chancellor will provide a framework of investment principles and a statement of strategic priorities for the Fund, before officially establishing the Fund and its new mandate in legislation.
The government has a chance to engage the market, international peers and wider experts to ensure the final institution catalyses investment to deliver jobs, energy security and a resilient future for the UK. This is an opportunity that cannot be passed up.
