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Whoever wins the upcoming UK general election will face a very difficult set of financial circumstances, perhaps best encapsulated by the famous 2010 note from the (then outgoing) Chief Secretary to the Treasury to his successor, “Dear Chief Secretary, I’m afraid to tell you there’s no money left.”
Financial markets face enormous challenges as countries accounting for two fifths of global GDP go to the polls, while rising international tensions risk spiralling into regional and possibly even global conflicts. Political and market volatility will feed each other. Supply chain fragmentation and sanctions will make it harder for central banks to reduce inflation. That in turn will have electoral consequences.
If forecasts are to be believed, many countries will endure another year of inflation and sluggish growth. Economists fear the Japanification of Europe, whereby institutional investors fly to safety in bond markets as interest rates remain high, eschewing investment opportunities that could support governments’ strategies to grow their economies through better investment allocation.
The Dollar’s position as the world’s global reserve currency is unlikely to be dislodged, especially at a time of geopolitical uncertainty. But an increasingly multipolar world will see the Dollar’s position come under threat over the longer term.
In short, with the national debt standing at 98% of GDP1 , more than £100 billion being spent on servicing this debt annually, little room to issue more according to the Debt Management Office2 , and the highest tax burden “as a percentage of national income, than at any time since the 1940s”3, whoever forms the next Government is going to be severely fiscally constrained.
With such clarity of circumstance it is no surprise that politicians across the political divide are shaping their thinking about how to stimulate the infrastructure investment that underpins economic growth in the era of increasingly constrained government spending which will define the next Parliament.
In that regard, recent history can be instructive. In fact it could be argued that today’s politicians face a not dissimilar set of choices to the those faced by the coalition after the surprise outcome of the 2010 election. So the questions about economic growth that are now being kicked around echo the thinking then – how to make the UK a more attractive investment destination for overseas investors, how to bring forward significant national infrastructure projects to kickstart economic growth, and (that hardy perennial) how to solve the housing crisis.
The good news is that the history of how those decisions played out is there if politicians want to learn from it. First, the political effort expended in attracting overseas investors has been largely irrelevant to the investment that we have received – if the geopolitical environment is favourable and the investment opportunity is attractive to highly mobile international and domestic investors alike, they will invest. On the flip side, changing geopolitical dynamics and national security concerns have totally undermined the political efforts to woo overseas investors, most notably (but not exclusively) the Chinese, who turned out to be significant geopolitical rivals, rather than partners in a new golden age.
The other bit of good news is that there is an abundance of capital looking to be invested in the UK. For example, domestic life insurance companies like Pension Insurance Corporation and our peers are expected, if there are sufficient projects available, to invest around £200 billion in UK infrastructure and built environment projects over the next decade to back policyholder pensions, creating significant social value. Which means that the more important question for politicians is, what are we seeking to attract investors to invest in? At the moment, there simply aren’t enough projects to meet investor demand.
Whilst prestigious national infrastructure projects are clearly important in context, they are notoriously difficult to bring forward and are risky to invest in because they are prone to delay, overspend, and even cancellation. So the main political focus should be on helping local and regional government bring forward the projects that will regenerate our towns and cities, provide high quality jobs, bridge the skills gap, and drive regional GDP growth, whilst achieving key policy goals, such as the provision of good quality, climate friendly housing.
This means that from a national perspective politicians should focus on less glamorous, but nevertheless crucial-to-solve, issues like the quality and quantity of planning officers in local government planning teams; the interplay between the plethora of regulators and arm’s length bodies and what this means for growth and prosperity; how to encourage genuine public-private partnerships with local government; how to raise governance standards within local government, including the production of investment data, long-term plans and so on; and understanding how the convening power of central government can help and enable local authorities to bring forward investable opportunities with the sufficient scale to make them attractive investments for long-term, institutional investors.
Not only would these types of reforms move us away from the mistakes made after 2010 by opening up a new wave of investment across the UK, they would also help insulate the economy from a geopolitical environment which is much more volatile than it was then, and which could potentially see a realignment of investment, economic activity and supply chains within politically aligned blocs.
Hindsight is a wonderful thing, but the lessons of 2010 can help provide a path through the fiscal constraints that the next government will face. These constraints will leave little room for error as the next government seeks to encourage the right sort of infrastructure investment to deliver economic growth.
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