Jeremy Apfel: The good news is that there is no shortage of UK domestic capital to invest
All eyes are fixed on 4 July. But whoever wins the election will have a very full inbox to deal with, not least how to create the conditions which will allow the UK to avoid what the Institute for Fiscal Studies has described as “the worst of both worlds”, meaning both subdued economic growth and higher spending on servicing the national debt.
Already the yield on government debt is the highest it has been since the Global Financial Crisis.
These constraints mean that increased public spending is likely to be in limited supply. Further government borrowing will be punished by markets in the form of higher debt repayment costs. This is a circumstance which the next Chancellor of the Exchequer will want to avoid at all costs – their credibility, and that of the UK itself, depend on sustainable public finances.
The question then is how we create the growth that brings sustainable public finances. In part it will mean creating denser, more connected cities and towns through infrastructure investment and regeneration projects, allowing us to benefit from the agglomeration effect, raising both GDP and the productivity of our urban centres. But this will mean escaping from the BANANA economy trap – "Build Absolutely Nothing Anywhere Near Anything" (or "Anyone") – holding us back.
The good news is that there is no shortage of UK domestic capital to invest – we are blessed with the second largest pensions and savings system in the world, after the US. The sector Pension Insurance Corporation (PIC) operates in expects to have up to £200bn to invest in UK infrastructure over the next 10 years.
But it will require a new narrative to build consensus – and that means that the social value of infrastructure and regeneration projects needs to be much better understood to usher in a new era of public-private partnerships, which are the only way to achieve our investment needs, given constrained government finances.
It will also require the next government to take a holistic view of the economy and of public sector agencies to understand which bits work well, and which bits need refining to remove blockages in the system.
Key priorities
A first priority for the new government should be to continue the review of how our regulators oversee the economy, building on the ideas set out in the recent white paper, making sure that inefficiencies are and investment can flow into the areas that we need it to. None of this should be controversial, or party political – if we want to achieve growth, it simply has to be done. Take, for example, the impact of the various regulatory and arms-length bodies on housebuilding over the past three decades.
According to industry bodies, entities like Natural England and the Environment Agency, by pursuing remits that are too narrow, have managed to prevent the delivery of considerable amounts of housing and infrastructure over several decades, including because there are too few reservoirs (in fact PIC recently funded the first new reservoir since 1991). Whilst they have met their specific objectives, we have all lost out on significant economic and productivity gains.
A second priority for the government should be how to mobilise the UK's long-term savings into supporting UK infrastructure. In places this is already happening, but there is a danger of entities like the UK Infrastructure Bank (UKIB) crowding out long-term investors as they struggle to invest themselves.
With a cheaper cost of capital, and no real limits on what they can invest in, we could end up in a situation, rather like Natural England, where the UKIB have met their brief, but we are worse off overall. It would make more sense for them to use their balance sheet and investment capital to take on the project risks that the private sector can't – like other, similar entities do – with the aim of creating social value, rather than competing on price.
There are more structural issues to overcome as well, as outlined in the work of the Purposeful Finance Commission (PFC), chaired by PIC's chief executive, including a lack of planning capacity within local government, especially among planning and regeneration teams.
As an example of a true public-private partnership, the PFC has proposed the creation of a fund of £22.5m provided by the private sector – any company with an interest in the planning system would be eligible – over three years to recruit additional planners. They would be centrally employed within the public sector to both prevent conflicts of interest and allow for effective deployment to the local authorities in greatest need.
As well as benefiting from a more efficient local planning system, the private sector companies would receive a kitemark or other marker of their commitment to social value creation from the government.
Whilst social value itself is an ill-defined term which means different things to different people, it is becoming increasingly important as a means of helping local authorities think about their funding priorities in different ways, with a view to bringing forward vital urban regeneration projects.
With Labour leading in the polls and expected to form the next government, it will also play an increasingly important role in national political debate, given that it echoes an idea first brought forward in the 1990s – that of stakeholder capitalism.
As has been noted, "the idea of stakeholder capitalism appeals, therefore, to two core Labour values, redistribution and participation". Both of these themes are likely to play out under a Labour government, should they win the election.
The term social value perhaps conceals the considerable redistribution which is happening as an outcome of infrastructure investment. This includes both intergenerational transfer, and socio-economic transfer, in that the savings of older, often wealthier people – members of defined benefit pension schemes – are being reinvested in sectors like social housing and urban regeneration, which are primarily used by younger, and less well-off cohorts.
We are already starting to see a shift in emphasis where Labour politicians who were elected in the local elections are focusing on building homes for social rent. For example, the new Labour Mayor of the West Midlands, Richard Parker, is reportedly bringing forward these types of projects rather than the Build-to-Rent developments favoured by his Tory predecessor, Andy Street. Angela Rayner has also pledged to build more social housing should Labour form the next government.
It's clear that the next government is going to have to escape the BANANA economy trap if we are to have any hope of achieving sustainable public finances. But it will require determination and a focus on social value creation.
Jeremy Apfel is managing director of corporate affairs at Pension Insurance Corporation
This article is included in the June 2024 edition of PIC's publication, Compound Interest, which is due to be published this week.
This article was published as part of Professional Pensions' PP Pensions Commission – which is looking to bring together industry opinion and ideas on the future of pensions ahead of the general election on 4 July.
Send your thoughts and ideas to the PP Pensions Commission via email to [email protected].
