The UK has been regulating for risk, but not regulating for growth.” Not the words of a radical free marketeer, but our Labour Chancellor Rachel Reeves speaking to city bigwigs at Mansion House this week. Reeves was referring specifically to the regime of financial regulation introduced after the 2008 financial crash, but her words apply to almost every area of regulation in Britain.
At the heart of the Chancellor’s pitch on the economy is the idea that Britain has a chronic problem with under-investment. In the City of London, we possess one of the world’s best financial centres. Our pension market is the third largest in the world. And yet, for decades Britain has been stuck at the bottom of the league tables for business investment. It is nearly three decades since Britain’s last invested more as a share of GDP than France, Germany or the United States.
In their essay Foundations, Ben Southwood, Sam Bowman, and Samuel Hughes point out that since 2016, our capital stock has actually shrunk, while across the rest of the G7, it has grown by 14 per cent on average.
Reeves wants to fix that, in part, by removing some of the post-crash red tape on things like bankers’ pay and compliance for senior managers. But the biggest shift she wants to make is on pensions. By the end of the decade, £800 billion will be held in Defined Contribution pensions on top of another £500 billion in the local government pension scheme. Yet despite our massive pensions market none of the world’s top 40 pension funds is British.
Simply put, our pension funds are inefficiently small. Why is this a problem? Because small pension funds have a lower appetite for risk. Without scale, you can’t make effective investments in private equity or major infrastructure projects. First, because you can’t spread risk across a diversified portfolio. Second, because unless you’re bringing serious cash to the table, the costs of management and due diligence simply eat into your returns too much.
Reeves notes that Australia’s super funds invest three times more in infrastructure and ten times more in private equity. When a British startup defies the odds and goes public at a billion pound valuation, it’s not British savers, but Canadian teachers who are the real winners.
Rewiring our financial system to have a higher risk appetite has to be part of the answer to lifting our low investment levels. But, it can only ever be part of the answer. It isn’t just finance where in Britain preventing hypothetical risks is prioritised over certain growth. In almost every sector of economy, risk-averse rules end up blocking investment altogether.
Reeves wants more pension fund investment in housing, but builders have to contend with fire-safety rules that the Government themselves concede are unlikely to save anyone’s life. It is all well loosening investment rules, but investment requires an investable proposition. When the last Government’s 18m Second Staircase mandate came in, developers were immediately forced to cut floorspace to make way. Many projects will still go ahead, but some won’t.
When our pension funds are persuaded to invest, the British planning system does its darndest to force them to rethink. Look at Legal and General’s experience with modular housing. They invested millions to build a factory in Leeds that produced low-carbon modular homes. There was one problem. Almost all of the projects in their pipeline were blocked or delayed by planning and EU-derived environmental red tape like nutrient neutrality rules. Factories without order books don’t last long.
Reeves touts Australia’s private investment in infrastructure, but who would want to invest in infrastructure with our albatross of a planning system. Manchester and Birmingham want to privately finance HS2 up to Manchester, but the journey up to Birmingham was bogged down with a £100m bat tunnel after Natural England decided that “no bat death is acceptable”.
In the last 25 years, France has built more miles of motorway than our entire motorway network. Almost all of it was built privately and financed by tolls.
The Lower Thames Crossing, a river crossing designed to relieve the ultra-congested Dartford Crossing, is on paper the perfect candidate for private finance. Yet, it’s been delayed repeatedly – most recently by the Transport Secretary Louise Haigh who requested more information on its environmental impact. The 360,000 page planning application, which cost £295 million to assemble, wasn’t sufficient. All of the “green bridges” and expensive gold-plating of construction mean that any private investor will need a big toll to turn a profit.
To get the City to invest and earn us all a return on our savings, Reeves needs to do more than unshackle our financial institutions. She needs to mount a full-fronted assault on the red tape that makes building in Britain next to impossible.