The Case for a UK Sovereign Wealth Fund

Read Aditya Chakrabortty’s piece on the fate of North Sea oil revenues and weep. He compares and contrasts British and Norwegian approaches to this spectacular windfall. Norway used the money to create a Sovereign Wealth Fund while Britain used the money to finance ‘tax cuts’. Except they weren’t really tax cuts at all. On the day Margaret Thatcher left office the tax burden had risen very slightly since the day she became Prime Minister. What she actually achieved was a shift from direct taxation to indirect taxation, thereby kick-starting a process of growing income equality that has culminated in a significant proportion of the population living in extreme poverty.

So this cavalier approach to the wealth of the nation was reversed when Labour took over from the Tories in 1997, right? Wrong. Labour used the money to increase welfare spending and reverse the degradation of public infrastructure that had occurred during the previous eighteen years. As Sir Geoffrey Howe remarked at Thatcher’s 80th birthday party, “Her real triumph was to have transformed not just one party but two, so that when Labour did eventually return, the great bulk of Thatcherism was accepted as irreversible.” Perhaps he was mindful of the fact that both main political parties had apparently agreed that the best use of North Sea Oil revenue was to buy votes.

Chakrabortty is eloquent in his enumeration of the benefits that now accrue to Norway as a result of its far-sighted decision, but is silent on the question of whether there is anything to be done to remedy the UK’s historic error. It is though North Sea oil revenues were a one-off windfall and it is now too late to take the kind of steps that have benefited Norway so handsomely. My contention is that this view is not only seriously mistaken, but that it dangerously compounds an unnecessary error.

Are North sea oil revenues a one-off windfall? Of course not. Although production is well past its peak, tax and royalty licensing revenues continue to flow, while new reserves are still being found. Money is still there. And North Sea oil isn’t the only geological windfall. If fracking doesn’t result in seismic disturbances, turn out to be illegal or meet with insurmountable environmental opposition a new source of revenue will emerge. At the same time, there are other significant windfall resources, not least among them telecommunications licensing revenues.

It doesn’t stop at windfalls. In fact, it hardly even begins with them. In The Public Wealth of Cities Dag Detter and Stefan Fölster have shown that there is a vast repository of potential wealth already in public hands. According to the IMF, the world’s public assets are worth at least twice global GDP. Detter points out that ‘Public real estate is often worth around 100% of the GDP of a given jurisdiction, the equivalent of a quarter of the total value of the real-estate market. Governments simply don’t realize this, implying massive opportunity costs.’ Detter applaud’s Singapore’s ‘unorthodox decision to unlock its public wealth by incorporating portfolios of assets into public-wealth funds, making professional managers responsible for public commercial assets.’ He further points out that ‘Temasek and GIC, the holding companies set up by the government, have used appropriate governance tools borrowed from the private sector to fund Singapore’s economic development.’

The British government also holds a substantial shareholding in banks acquired in the wake of the 2008 financial crisis. Instead of offloading these unprofitably as has been the case (a clear dereliction of public duty, it might be argued), proper professional management of this portfolio for the long term could provide substantial capital growth together with a strong income stream. And this issue of professional management on the basis of sound, appropriate governance and political independence is a central one: the right setup will produce the right results, as already evidenced elsewhere. Nor should it be argued that the UK lacks the basic resources to achieve this, indeed, quite the reverse. The City of London is home to a wealth of world-class financial management skills, honed over a long history of success. Government has all the required expertise on its doorstep.

Thus, there can be no doubt that an outstanding opportunity has been missed. One way of making up for this would be to set up a UK Sovereign Wealth Fund and for the foreseeable future load into it a fixed percentage of UK tax revenue. The immediate outcry at such a suggestion would be one of affordability. Perhaps this is best answered by turning the question on its head – can we afford not to do it? Demographics suggest that we are heading for a crisis – a point at which an ageing population and its needs (health, social care, pensions) runs beyond the ability of the tax-base to pay for it. Measures have been taken to raise the age at which state pension becomes payable, and there is discussion of further such measures. On this basis an alternative must be found and the income from a Sovereign Wealth Fund can provide this.

For some it might seem perverse to finance a Sovereign Wealth Fund from taxation while a government is in debt. A more prosaic response to the affordability question comes from the Thatcher/Merkel school of domestic finance: would we advise a young couple with a large mortgage to save nothing and to make no pension contributions? Of course not. Prudence demands that adequate provision be made for a future point when income will be insufficient to cover living costs. This is just as true for the state as it is for the individual.

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