Rachel Reeves’ first speech last week at the Treasury underlined the ambitions of the Labour party to see economic growth as the solution to the UK’s problems of underfunded public services and falling standards of living amongst working people.
With much made of the affordability of policies during the election campaign, politicians are now more keenly aware of the fragility of the UK gilt market and the already stretched ratio of debt to GDP, meaning spending promises were limited to trivial numbers, offsetting even more trivial revenue proposals.
With clear promises not to raise the four big taxes in the UK – income tax, national insurance, VAT or corporation tax – this suggests that while others may be up for grabs, better economic growth has been seen as central to the government’s ability to eventually follow through on their manifesto in coming years.
What Reeves’ speech did was lay the groundwork for tax rises of some sort at the Autumn Budget.
With clear emphasis of the challenging economic legacy they have inherited and repeated mention of the difficult decisions lying ahead, the chancellor has already requested an assessment of the UK’s current fiscal position to be presented to parliament before recess, potentially acting as the precursor to coming tax hikes.
With five years until the next election, Labour may just think now is the time to take their medicine, in the hope things improve over the course of this parliament.
However, with no explicit mention of taxation in this speech, we are instead left with other policies Labour is hoping will bring about that higher economic growth and plug the gap in the funding of public services.
Specifically, the government is seeing three key pillars to this growth: stability, investment and reform, with planning policy and the launch of a national wealth fund at the heart.
Green investment renewal
Starting with the latter, national wealth funds – often known as sovereign wealth funds – conjure up images of Norwegian and Saudi oil fields, which have provided the bulk of assets in this area.
These funds, while heavily reliant on profits from fossil fuels, have been hugely successful in funding both economic growth and social security for its citizens.
However, with UK’s public finances in somewhat of a concerned state, ‘national wealth’ is almost a contradiction in terms when government debt is almost 100 per cent of GDP.
As a result, the new national wealth fund will be a minnow in comparison with just £7.3bn, funded by borrowing, to be used as a catalyst.
It is hoped this will bring in private investment that would otherwise not be forthcoming, focusing on sectors that can help the UK achieve its net-zero ambitions such as gigafactories, as well as mitigate some of the risks that have held back private investors in the past.
The challenges in these areas are very high and will be hard to overcome and thus success may be limited.
For example, gigafactories (large scale manufacturing facilities for electric vehicle batteries and grid scale storage) face issues from a lack of lithium supplies, to a lack of demand from auto original equipment manufacturers who already have purchase agreements elsewhere, high upfront capital requirements and structurally higher costs than China or Europe.
