I’m travelling down to London on the Avanti West Coast Line, reading a paper that’s been sent me from Perthshire by my friends. The paper’s called “Why Britain’s stagnated” and it’s written by Ben Southwell, Samuel Hughes and Sam Bowman.
My friends call it a “most important work” and it’s not hard to see why. “What oft’s been thought but ne’er so well expressed”
…the most important reason Britain sees underinvestment today is that the state bans the very investments that would be most valuable. If allowed, private investors would be rushing to build housing, transport infrastructure and energy infrastructure.
France’s thousands of miles of motorways were built, and are operated by, private companies. Britain’s roads, canals, and railways were originally built this way. If done today, this would show up as enormous amounts of capital investment in the national accounts. But as we will show, building these things is prohibited in the vast majority of cases in which it would be economically rational. If we change that, Britain would see an enormous construction boom as suppressed demand for these things was met, and the resulting capital assets would continue contributing to the economy indefinitely.
Improving the UK’s investment rate would bring great benefits: about half the shortfall in productivity growth since the financial crisis can be attributed to underinvestment in (tangible) capital, while much of the rest is likely to be due to the shortfall in intangible investments like R&D.
Investment is what makes us richer over time. Any successful economic plan will have to unleash it in order to succeed. But even as the need for higher investment becomes more widely accepted by Britain’s economic commentators, they tend to propose more quangos and subsidies to tackle the problem, because they miss two crucial points.
First: private investment is far more significant than government investment. Public investment can be extremely important, especially in areas that have large spillovers to the broad economy, but which do not always generate a private return. But more than 80 percent of investment in the UK and most other developed countries is done by the private sector. Public investment was 18.0 percent of the UK total in 2021, 17.6 percent in 2020, and 15.5 percent in 2019.
And second: apart from taxes on investment like corporation tax and capital gains tax, higher investment in the UK is mainly frustrated by systems that effectively ban private companies from doing it (like building houses, infrastructure, and energy generation), rather than being down to short-sightedness by these businesses, or a lack of generosity by government.
Commentators have searched far and wide for explanations of Britain’s investment problem. But the explanation was before our eyes all along. Buildings, energy and transport infrastructure are the investments that Britain most needs, and they are largely banned. In banning them, we have generated higher costs for a range of other investments too. There is no need to posit esoteric cultural problems among British businesspeople, no need for a dozen more government strategies, deals and consultations. We don’t need to pay businesses to invest more. We just need to stop banning them from doing so.
This theme reappears a few pages later , after we have had it explained why the French are so much richer than we are
private investment is blocked from going where it could generate the highest returns, meaning we have lower investment than all our peer economies; in particular we do not allow investment in the infrastructure we need to allow people to access prosperous areas, the houses they need to live there, and the offices, labs, factories, and warehouses they need to work there, which, together with our high and rising energy costs, stop the companies in those cities reaching their full potential.
Another of my Scottish friends me a separate article , this time in Portfolio Institutional
Fundamentally, in the U.K., what needs to change is the view that security (equals) investing in gilts,” or U.K. government bonds, said Benoit Hudon, CEO and president at Mercer U.K., and himself Canadian-born. “Indeed, when looking at the average funded status of pension schemes around the world, the U.K. compares unfavorably, and this is in large part driven by investment strategies which have too often ignored the benefits, over time, of investing in growth assets,” such as equities and infrastructure, he said.
This [new Labour] government has “enthusiastically embraced a couple of steps up in the ambition of this sector of the economy doing more win-win things,” Roger Urwin, co-founder of the Thinking Ahead Institute, added. “This is not taking anything from the pension sector — quite the reverse (in) trying to encourage its efficiency and streamlining — but doing it to benefit the U.K. economy as well. From that point of view, it is quite neat, particularly at a time where net zero and sustainability” are big focuses, he added.
It’s not the leaving of Liverpool that grieves me, but the opportunity lost,
I struggle to see this in the area where I live. There are several sites where the private sector has already got planning permission to build homes, offices and shops. They are just not going ahead and building them, and that is not because they are in any way banned from doing so.
If they have full planning permission, they have three years in which to start construction work on the site.
And if they only have outline planning permission, they have three years to seek planning permission for their reserved matters, or the details about the design, siting, accesses, and landscaping of the proposed development.
There are some ways to keep planning approval “alive”, such as taking visible first actions.
These actions are called “material operations” and include:
Construction work
Demolition work
Digging trenches
Laying underground mains or pipes
Road construction
Changing the use of land
Indeed, and in several local cases the developers have done some token work just before the planning permission would have expired. That allows the permission to be left valid for all eternity. But an unimplemented development is of no use at all to anybody else. The suggestion in the original article was that private enterprise wasn’t being permitted to invest in many things – the reality in many cases is just that they are choosing not to do so.
It’s important to read the Paper.
It’s not about building houses!
No GDP growth then no pensions paid.
The issue can be distilled down to one set of facts:
– The UK produces much much less electricity (energy) per head than other 1st world economies (France 50% more than UK, and USA 3 times more) and
– what energy we do produce is at a multiple of the cost of our competitors
– If we follow this current trajectory, tinkering in political malaise, economic disaster is assured.
Other than over the short term, gross economic activity and output is a function of the amount and cost of energy. Simples.
During the 19th and 20th centuries, that access to energy was through decarbonisation – follow the output and the control of oil and coal resources and you can track the course of economic growth around the world over the last 200 years.
Everything we need, and do, to survive (food production, making equipment and machines, transport, homes/shelter, even our kid’s insatiably appetites for iPhones etc, etc) requires energy.
As a nation we are so inefficient at general production and vital infrastructure and so behind the curve, that it will take a Herculean effort to get our country back on track [from the Paper: “ • The planning documentation for the Lower Thames Crossing, a proposed tunnel under the Thames connecting Kent and Essex, runs to 360,000 pages, and the application process alone has cost £297 million. That ismore than twice as much as it cost in Norway to actually build the longest road tunnel in the world.” A lawyers dream !]
The Paper (not unusually – many spend side economists either overlook or don’t understand the supply side impact of pension investment) doesn’t comment on the critically damaging role of pensions in this, and in particularly of the DB disinvestment drag of the last 2 decades.
The UK DB Regulatory impact has had the same detrimental effect on our economy as if the Govt had set a fiscal policy to disinvest DB schemes out of growth assets/equities at a rate of say 1.5% p.a. for the last 20 years. If any other nation was to announce that now as a fiscal economic policy, there’d rightly be guffaws at the folly and warnings of the resulting economic doom to follow. And so it has come to pass.
To reinforce this dis-investment cult, UK DB pension regulation actually now defines taking ‘risk’ ( ie to invest) as a potentially criminal activity worthy of jail time (with hindsight applied) so bloodyminded determined were/are the unaccountable Brighton heavies to dissuade well-intended often volunteer representative Trustees of anything other than gilt “investing”. [of course, it’s a folly to think of gilts as “investing” for pension schemes on a whole system basis – it’s merely a tax deferral, as Gov’ts strip schemes today of investment assets selling / swapping for gilts in order to prop up our excessive social security/NHS bill, blindly hoping somehow future generations will find the ways and means (and the inclination) to pay the higher taxes our generation currently can’t afford and that will be needed to service the truly colossal gilt glut generated national debt in order to pay our pensions, please!].
The solutions are obvious and simple, but will require us to take our medicine. Less regulation, more private and public investment, and crucially reversing the strangling disinvestment mandate of TPR ( better still abolish TPR, by any objective assessment it has been disastrous for pension adequacy and economic investment and growth in our country) by requiring that DB schemes incrementally increase investment in growth and or infrastructure assets by only 2% p.a. compounding, as the small price for UK regulatory protection and continued tax favoured regime.
The main blocker to this will of course be “the industry”, that populated by the 55-65 aged cohort ( me too) who’ll spend more energy securing their tax fee cash, or the many who will ignore the now understood problems, looking instead to get at least one more super bonus out of the duckshoot of the ensuing bulk transfer frenzy to top up their own nest eggs.
Of the £50bn annual transfers, some c£10bn of that will end up as profits for the insurers, and padding of city and consultancy bonuses ( nb buy-in expenses, legal / actuarial etc at ‘only’ 0.2% -0.3% get lost in the roundings, but still that’s c£150m pa in consulting fees – you get a sense of what drives the advisory perspective; all wanting just ‘the one more big deal’). More depressingly, that £10bn of surplus/ value once transferred from Schemes can never ever benefit members or sponsors to whom it rightly belongs. But worse it’s further embedding a low risk low aspiration investment mindset, with the expected economic results.
Perhaps another part of the jigsaw will be positive age discrimination.
It’s seriously problematic that the industry and Trustee boards are massively under-representative of the under [50s]. It would be a bold and positive step to require every Scheme, master trust etc to have equal representation from each of the 5 working cohorts [ 20s, 30s, …60s], and also equal male/female representation. You can be pretty sure the working 20-45 year olds would not be choosing to transfer £10bn p.a. of surplus to the insurance clique, and they wouldn’t vote for continued disinvest now / higher taxes later mandates.
As I say, all involved and interested in pensions and in our nation’s ability to invest to pay future pensions, please take 5 minutes read the Paper, and then think what we in pension need to do to play our part in ensuring a better future, and selfishly to sustain an economy capable of paying our pensions.