Since its foundation in 1900, the Labour party has had a Janus-headed attitude to capitalism. It needs capitalism to be successful, dynamic and job creating, even while it instinctively distrusts capitalism, with its capacity to generate extreme inequality, invest too little, cut corners and treat workers exploitatively. But its past efforts at improving things – nationalisation, top-down planning, championing strong trade unions or simply (as New Labour did) largely giving capitalism its head – have not been notably successful. It has been a standoff that the Conservative party has ruthlessly exploited.
The seismic importance of 4 July is that Conservatism’s approach to wealth generation – trying to shrink the state whose size and excess taxes supposedly “crowds out” suppressed investment and enterprise – is exposed as a dead end of stagnant living standards and eviscerated public services. Keir Starmer, boxed in by this dreadful legacy, has declared that Labour will become the party of growth and wealth generation. Only thus can sustained tax revenues be generated to repair the ravages of the past 14 years. My bet is that he has a better than even chance of pulling it off – and transforming Labour into Britain’s natural party of government.
His first advantage is that the economic evidence is unambiguous: the state does not “crowd out” investment, and low taxes do little to stimulate enterprise. What capitalism needs from the state is well-designed and stable policy that proactively manages the business cycle while “crowding in” innovation, infrastructure and abundant fit-for-purpose training, and shapes the savings system to deliver buoyant company share prices – the necessary if insufficient precondition for raising capital to enable higher investment and a startup and scale-up boom.
This is becoming the new common sense in business, finance and the financial markets. It is why investors are buying shares anticipating a Labour government, and why Dame Amanda Blanc, CEO of Aviva, suggested last week that there could be as much as £100bn from UK insurers ready to flow into business investment if chancellor Rachel Reeves can deliver her promises on stability. That alone would go some way to lift British public and private investment by £100bn every year – the scale of the gap between us and our major competitors – while not risking another Liz Truss-style fiasco.
One important avenue to growth, cited in the Labour manifesto, is the prospect of unleashing some of the £1.4tn funds fossilised in Britain’s 5,100 defined benefit pension fund schemes. Linked to a generous fraction of workers’ final year’s pay, they have become a financial burden. To wind them up, companies have closed them to new members, creating a £1.4tn universe of wholly risk-averse zombie funds. They need to be consolidated into bigger funds that can take risks – and the money made to work to accelerate Britain’s investment recovery.
There is the tool to hand. One of the most startling policy successes of the past 20 years has been New Labour’s Pension Protection Fund (PPF), established in 2005, which takes over the management of distressed defined benefit pension funds, guaranteeing the future pensions. Managed with great professionalism, the PPF has already consolidated more than 1,100 pension funds and is currently worth £33bn with a £12bn investment surplus – one of the most successful funds of its type globally in securing high investment performance. Industry insiders believe that there is another £600bn locked up in small, high-cost zombie funds that could be liberated for productive investment.
The first staging post would be to scale up the current PPF to at least £100bn. Conservative objections that this would leave the pension funds with no fiscal backstop can be easily overcome; backed by the state, the PPF will become the new backstop via a guarantee that does not score as public borrowing. Nor, because the PPF is so rich, would the state ever be at risk. Reeves will be on her way.
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After all, such a guarantee is already delegated to the UK Infrastructure Bank (UKIB) to underwrite £10bn of commercial bank lending on infrastructure projects. Reeves should lift the facility to £50bn. A similar guarantee would enable the British Business Bank (BBB) to offer venture debt to startups and scale-ups, and seek out promising companies to back: there is an estimated annual shortage of up to £10bn of venture lending that needs to be closed. My understanding is that a scaled-up PPF would support both the UKIB and BBB; at a stroke, Britain would have equipped itself with an investment trio of financial institutions dedicated to serious multibillion-pound economic development and resultant growth – without additional direct government borrowing. It’s a fiscal get-out-of-jail-free card.
Against this background, Reeves can use her proposed rewriting of the fiscal rules to supplement public investment directly. The Financial Times recently reported that asset managers would buy an extra £20bn-£30bn of government debt if it were earmarked for investment projects and R&D. Altogether, the UK’s growth rate could accelerate to above 2.5% by the end of the parliament, with even the dropped £28bn target for green spending met. Growth would be higher again the more Britain regained access to lost EU markets.
In the near future, before growth kicks in, Starmer and Reeves may have to increase the current yields from capital gains, inheritance and council tax by up to another 1% of GDP. But overall there will be the funds to resuscitate education, the NHS, local government, defence, the criminal justice system, the arts and welfare. Do I dream? Some commitments are in the manifesto, others set out in Reeves’ Mais lecture in March, others have not been excluded during the election campaign, and the ambitious teams in the investment trio are all standing by for the call.
Some in the Treasury will oppose. And never underestimate the conservatism and parochialism of the pension fund world. Geopolitics may kill all hopes. But Britain under Labour could at last fulfil its economic promise and build a high-investment, inclusive, high-wage capitalism that treats its workers fairly. This time, no mistakes.
