Five things Rachel Reeves should do if she’s serious about growth
Rachel Reeves’ pensions reforms are welcome, but they are treating the symptoms, not the causes of low growth. Here’s what she should do next….
In her Mansion House speech last week, Rachel Reeves announced the consolidation of the 86 Local Government Pensions Schemes (LGPS) into eight ‘megafunds’, unlocking deep reserves of investment finance. This is a welcome and long overdue step – first proposed for UK funds a decade ago in a series of papers by pensions expert Michael Johnson for the Centre for Policy Studies.
Yet despite being very welcome, LGPS reform only addresses the symptoms, not the underlying causes, of Britain’s economic malaise.
The laudable aim of consolidation is to create economies of scale – cutting bureaucracy and advisor fees while unlocking larger but potentially more lucrative investment opportunities. Currently LGPS funds are underweighted in productive assets compared to high-performing public sector pension funds like Canada’s Ontario Teachers fund. In theory, consolidation could see more capital flow to UK equities and infrastructure projects.
That is certainly what the Chancellor has in mind – hence her talk of unlocking more money for “local economies”. But thankfully, Reeves has (so far) shied away from investment quotas. This would have been hard to square with the fiduciary duty on fund managers to maximise returns to their investors.
Of course, the UK absolutely does need more capital investment (especially by business) – and the finance to back this up. Otherwise we’ll never get back to anything approaching pre-2008 trend growth rates. And there are very real problems with access to finance for local businesses looking to expand and for ambitious start-ups in tech hotspots.
Lack of finance or lack of good investment opportunities
But there is something of a chicken-and-egg quality to this. Is it the lack of finance that is the problem? Or the lack of good investment opportunities? For there are many other factors holding back investment in the British economy.
We could argue until the cows come home about the precise relative importance of the different factors at play, but I would argue there are five key things that Reeves should address if she’s serious about growth (and she needs to be, given Labour’s spending plans and demographic pressures to boot).
First, planning reform. It’s far too hard to build houses in the most productive parts of the country – like London, Oxford, and Cambridge – which holds back the productivity-boosting clustering. It’s also unduly costly to build new factories and laboratories. Ditto for public infrastructure (HS2 is costing us £396m per mile).
Second, energy costs. This is partly downstream of planning. We now have the most expensive industrial electricity of any OECD country – four times the level of the US. You can’t run a profitable semi-conductor fab or battery gigafactory in these conditions.
Third, we have an incredibly distorting and uncompetitive tax system that is in desperate need of root-and-branch reform. According to the US-based Tax Foundation, we rank 30th out of 38 OECD countries for tax competitiveness. The Budget was a missed opportunity to do something about this.
Fourth, we have a relatively unselective immigration system which admits large volumes of low-skilled labour, distorting investment incentives and diluting the capital stock.
Fifth, businesses have been swamped by an ever-rising tide of regulation, sapping dynamism and diverting resources away from productive uses. In the 2010s alone, new regulations increased costs to business by £6bn a year net – almost equivalent to a 2p increase in corporation tax.
So while it’s all very well freeing up pensions capital, unless we can dramatically improve the investment case for the UK, there’s no reason to think it would or should flow here. Rationally, LGPS fund managers should be investing in NASDAQ, not the FTSE.
We know Labour and Rachel Reeves can talk the talk on economic growth. But while LGPS reform is a start, they’ve got a lot more to do on fixing the fundamentals before we know they can walk the walk.
Karl Williams is research director at the Centre for Policy Studies