One of the most famous pieces of football commentary came at the end of a match in Oslo more than 35 years ago in which unfancied Norway beat England 2-1. Few fans could now name the Norwegian commentator, Bjørge Lillelien, but plenty remember the rant and how it ended: “Maggie Thatcher, can you hear me? Your boys took one hell of a beating.”
The humiliation for the boys with three lions on their shirts took place in 1981 during the early stages of a North Sea oil boom that benefited both Norway and Britain. Norway decided that it would set up a sovereign wealth fund – a piggy bank for the people – so future generations would reap the benefits of the unexpected bonanza. Britain did not.
The result is that Norway has amassed $885bn (£727bn) – easily enough to cope with the cost of looking after a population of 5 million as it ages. In Britain, by contrast, the NHS is at breaking point, the social care system is struggling to cope and there is no pot of gold to pay for the healthcare and nursing fees of the baby boomer generation as it advances into old age. Norway is currently winning the sovereign wealth fund contest $885bn to nil. One hell of a beating indeed.
The lack of a UK-wide fund speaks volumes. There is an ingrained culture of short-termism in which consumers spend more than they earn and governments can see no further than the next election. As the Wikipedia list of sovereign wealth funds shows, even the world’s poorest countries have tried to put some of the proceeds from oil and gas extraction away for a rainy day. Ghana and Gabon, for example, both have such funds.
One result of last year’s EU referendum is that it has forced people to take a long, hard look at Britain’s economic model and come up with possible remedies for its weaknesses. These have been perfectly encapsulated in the six months since the Brexit vote. The economy is growing at a fair old lick, but mainly because consumers are out on a debt-fuelled spending spree.
Britain has the lowest investment rate in the G7, a frighteningly large balance of payments deficit, and – as any long-suffering commuter shivering on a station this winter will testify – public infrastructure that doesn’t pass muster. The supply of new homes in parts of the country with strong local labour markets is insufficient to keep pace with demand. It is obvious that structural change is needed, but the question is how to bring it about.
Here are a couple of ideas recently aired. Thomas Aubrey, who runs the Centre for Progressive Capitalism, says in a report that one problem limiting new house building is that the local infrastructure needed to support new developments is low. This is because it tends to be paid for out of general public expenditure and when it comes to a list of government priorities, a new road or bridge ranks lower than an NHS funding crisis.
Internationally, this way of funding infrastructure is the exception rather than the rule. Across Europe and Asia, other countries use land value capture to fund projects. They acquire land for housing at existing – usually industrial or agricultural – use value. Re-designation for a new housing project increases the value of the land, which is the local authorities then capture, allowing them to fund new infrastructure investment.
This is not the way it works in England and Wales. The 1961 Land Compensation Act means that landowners are guaranteed the uplift in land values if, say, an industrial site is designated for housing.
“This means there is less financing around for large-scale infrastructure investment to open up new areas for housing,” Aubrey says. The ability of a small number of landowners to generate windfall profits in this way undermines the legitimacy of the economic system he adds.
The solution, he says, is to amend the 1961 act so that land designated in a strategic plan for transport or housing would not take account of any prospective planning permission when deciding on the level of compensation. The public rather than the landowners who reap the benefits, which Aubrey estimates would provide the wherewithal to spend an extra £172bn on infrastructure investment over the next 20 years. That would result in a lot more houses being built and, if the government is serious about making the economy work for everyone, such reform will feature in the forthcoming housing white paper.
John Penrose, the Conservative MP for Weston-super-Mare, has a more radical suggestion – do what should have been done all those years ago and launch a sovereign wealth fund.
This would not be easy. North Sea oil and gas production is well past its peak. The proceeds of the boom years have been spent and Britain is a net importer of energy again.
Penrose says the way to finance a sovereign wealth fund is through a national debt charge. This would be carved out of income tax and pay for the interest on the national debt.
The national debt charge would be set as a percentage of GDP, and as the economy grows any surplus would be used to pay off the national debt and build up a fund that would cover the liabilities in the pensions and benefits systems.
This would need to be a very large fund, worth double the current size of the economy, and would clearly take a long time to build up. Penrose thinks it might take a century and has been trying to gauge the extent of all-party support for the idea.
There are two parts of the plan that might appeal to opposition parties. The first is his suggestion the government should legislate a target for the percentage of GDP to be spent on long-term infrastructure investment similar to the 0.7% in place for overseas development and 2% for defence.
The second is that there is justifiable concern that young people are being unfairly saddled with the costs of a pay-as-you-go system for pensions and welfare that are bound to rise over time. Inter-generational fairness is becoming an important political issue.
Penrose argues that borrowing can only be justified for infrastructure spending, because investment in public works benefits future as well as the current generation. Labour agrees that borrowing should only be for investment, although it is likely that the shadow chancellor, John McDonnell, will take some persuading to sign up to Penrose’s plan to have a totally balanced budget across the business cycle.
A bigger problem is that creating a sovereign wealth fund would involve deferred gratification, or having less today in exchange for more tomorrow. That’s not how we do things in Britain.