The Labour Party’s proposed £7.3 billion National Wealth Fund (NWF) aims to address our chronic underfunding issue by injecting capital into key sectors such as ports, gigafactories, clean steel, carbon capture, and green hydrogen. While this initiative is a commendable step towards revitalising the economy and fostering sustainable growth, it raises critical questions about whether the scale of investment is sufficient to meet the country’s vast needs.
The UK has long grappled with a persistent underinvestment problem, casting a long shadow over its economic prospects. Despite being one of the world’s leading economies, the nation consistently finds itself lagging behind its G7 peers in both public and private sector investment. This historical shortfall has stunted economic growth, productivity, and the potential for innovation, leaving the UK in a precarious position as it navigates the challenges of the 21st century.
Since 1990, the UK has failed to surpass the G7 median level of investment as a percentage of GDP. This is a long-term trend that has stunted the nation’s economic potential. In 2021, the UK’s business investment performance was particularly dismal, placing 27th out of 30 OECD countries, only ahead of Poland, Luxembourg, and Greece. This underperformance is stark when compared to other developed economies.
The consequences of this investment shortfall are substantial. Had the UK maintained median G7 investment levels from 2006 to 2021, businesses would have injected an additional £354.3 billion into the economy in real terms. The public sector, too, has lagged behind. If the British government had matched the median public investment levels of the G7 over the same period, it would have added £208.4 billion more. Combining both public and private sectors, the UK missed out on over £562.7 billion in investment over 16 years, equivalent to building thirty Elizabeth Lines.
Sector-specific underinvestment has also taken a toll, particularly in green technologies and infrastructure. The UK’s progress towards decarbonising its economy and capturing the benefits of the green industrial revolution has been slow. Global green industries, which could be worth $10.3 trillion by 2050, present a significant opportunity that the UK risks missing due to insufficient investment.
The Labour Party’s proposed £7.3 billion National Wealth Fund is a commendable step towards addressing the UK’s chronic underinvestment. It signals a commitment to revitalise key sectors of the economy. However the scale of this investment is modest compared to the vast needs of the UK economy.
Consider Norway’s sovereign wealth fund, which started in the 1990s with North Sea oil revenues and has grown to an impressive $1.6 trillion. Norway’s strategic foresight highlights what’s possible with sustained, large-scale investment. In comparison, the National Wealth Fund’s £7.3 billion, represents a much smaller-scale effort. It is clear that the two should not be seen in the same light. By using the name ‘National Wealth Fund’ Labour has perhaps set the fund up to fail. Although its aims are by no means the same as traditional sovereign wealth funds, it is likely to be compared against them for the life of the policy; a battle it is unlikely to win.
The sectors targeted by the NWF – ports, gigafactories, clean steel, carbon capture, and green hydrogen – are all critical for the UK’s future. Each of these sectors has transformative potential for the economy and the environment. For instance, upgrading ports to handle the next generation of sustainable shipping, or establishing gigafactories to support electric vehicle production, are steps in the right direction. Clean steel and carbon capture are vital for reducing industrial emissions, and green hydrogen can revolutionise energy storage and usage.
Yet, the financial requirements of these sectors are immense. Ports alone can demand billions in investment to modernise and expand. The same goes for gigafactories, which are capital-intensive but crucial for the automotive industry’s future. Clean steel technology, carbon capture, and green hydrogen development also require substantial funding to reach their full potential. The £7.3 billion, spread across these ambitious projects, risks being insufficient to drive the substantial change needed.
Nevertheless, the National Wealth Fund (NWF) sets an ambitious target: for every £1 of public investment, it aims to attract £3 from the private sector. While leveraging private investment is a commendable goal, achieving this 3:1 ratio is a tall order in the current economic climate.
The former Green Investment Bank, which aimed to stimulate private investment in green projects, provides some historical context. While it did manage to attract private capital, this accounted for £2.50 for every £1 of public money spent. Since then, a number of factors have conspired to make the UK a less attractive proposition for investment. The UK’s departure from the EU has created a more complex and less predictable environment, and brought about regulatory uncertainty. In addition to this, both the US and EU have launched substantial green investment initiatives that dwarf the National Wealth Fund in size and scope, making these areas a more exciting proposition for foreign direct investment.
Given these factors, the NWF’s goal of leveraging £3 of private investment for every £1 of public money appears optimistic. While the intent is laudable and the sectors chosen are critical for the UK’s future, it may not fully account for the current economic realities and state of underinvestment that the UK finds itself in.
A report by the LSE has estimated that the UK would need £26bn worth of investment each year to simultaneously address climate change and grow the economy. Labour’s plans will likely stretch this sum over a Parliament, so a range of other significant measures will be needed to sustainably grow the economy.