17 June 2019

The case for a sovereign wealth fund

By John Penrose MP

The age of austerity is nearly over. After eight long years, we aren’t having to borrow to pay for day-to-day spending on essentials like health, education, policing or defence. It’s all funded by our taxes, at last. We’re paying our way without maxing out the national credit card. Hooray!

But why has bringing down the Government’s annual deficit been so important? Was it just an ideological obsession? Have we been sacrificing long-suffering, hard-working families on a flinty free-market economic altar? Or is there something more fundamentally important at work?

Yes there is. And it matters a lot. Because if we borrow money to pay for day-to-day spending on things like hospitals, schools or policing, we are expecting future generations to pay the bills when they come due. We are asking our children and grandchildren to pick up the tab for our lifestyle today. And that is morally wrong, generationally unjust and unfair. They will have their own public services to pay for and we shouldn’t expect them to pay for ours as well.

But as we get closer to our target and to eliminating our budget deficit, we mustn’t forget the total levels of taxpayer ‘IOUs’ which will, ultimately, have to be repaid as well. The enormous overall mortgage which all those annual borrowings have racked up, across decades, and which hasn’t gone away. It’s still there, looming in the distance, and it can’t be ignored.

Worse still, we aren’t being honest with ourselves about what we owe. Our traditional way of measuring the national debt, which focuses only on the bonds which the Treasury uses to finance our enormous borrowings, gives a horribly over-optimistic picture of the true scale of the problem. No business would claim the level of its long-term debt reflects a fair portrait of its overall balance sheet and no company CFO would last long if they only bothered with their firm’s bonds and ignored all their other liabilities completely.

If we published honest figures showing everything we owe, we’d have to include all sorts of other things as well. From nuclear decommissioning to PFI contracts, public sector and state pensions, the list of what we owe is much longer than we normally admit.

If we give the public a more complete, accurate and honest picture of the Government’s (and taxpayers’) overall financial position, the true results are scary. Depending on who you ask, it’s somewhere between four and seven times bigger than the official figures admit.

Yes, you read that right. We are only counting between a seventh and a quarter of what we owe.

Admit the debt problem

So, like any addict, the first step is to stop denying we’ve got a problem. We can’t keep kidding ourselves about the scale and depth of the IOUs which we are bequeathing to future generations of taxpayers.

We’re like alcoholics who, instead of being addicted to booze, are bingeing on debts instead. And, as with an addict trying to hide their habit by stashing vodka bottles down the back of the sofa, ignoring all those other bills won’t make them go away. It is neither honest nor fair to let accountancy hide the economic reality.

A full national balance sheet

How can we face this issue honestly and squarely? Transparency would help. If the Chancellor asked the Office for Budget Responsibility to publish a full, broad-based national balance sheet as part of the financial projections at each Budget in future, we’d have a much clearer picture of what was happening. We’d know immediately whether the overall size of Britain’s mortgage had gone up or down.

Transparency encourages sound finances and better, more honest political debate. Conversely, hiding or ignoring the problem makes it easier for irresponsible populists to hide more vodka bottles of debt down the backs of Britain’s sofas.

But once we’ve faced our problem, what then? How do we solve it?

Understand the demographics

Doing nothing isn’t an option. The demographic time bomb of more and more pensioners being funded by fewer and fewer working-age taxpayers will see to that. Carrying on as we are, or kicking the can down the road and hoping that something will turn up, simply isn’t financially sustainable. If we just try to muddle through, we will have bequeathed a cold and mean future of much higher taxes and worse public services to our children and grandchildren.

Economically, oversize government debts matter too. They hamstring economic growth, crowding out private sector investment so wealthcreating projects can’t happen, and drive up interest rates so the remainder cost more than they should. They stifle entrepreneurs and dampen wealth creation for years.

They matter internationally too. A strong economy and public finances underpin and finance any government’s political power at home and abroad. They give Britain a strong and influential ‘soft power’ voice in most international gatherings we care to join, whether they are international aid conferences, climate change negotiations, or global financial institutions like the IMF and World Bank. Without them, we would cut a much smaller figure on the international stage.

So we can’t carry on as we are. We’ve got to consider ways of reducing our national debt mountain. And because of the demographic time bomb, faster economic growth and productivity improvements won’t be enough to solve the problem on their own. We need to save a bit too. And not just by paying off the debt; that would take years. We can solve the problem much faster if we invest in something that gives us a fatter return – a profit – as well.

The case for a sovereign wealth fund

There’s only one way to do it; we’ve got to endow and invest a growing fund of assets to match and underpin a big slice of our liabilities. A sovereign wealth fund for the UK. It will take years, so we’ve got to start now. But, given time, we can save and invest our way out of trouble.

Australia has a sovereign wealth fund, and so does Norway. Norway’s fund, which just passed a trillion euros in value, is invested in everything from West End London property to Facebook, Google and Amazon. Through it, every Norwegian citizen, whether they’re young or old, rich or poor, owns a stake.

It would be financially sensible too. The assets in Britain’s sovereign wealth fund would be safe, ‘investment grade’ shares, properties and infrastructure, just like a pension fund. They’d earn a better return than government bonds, too: why repay gilts for a paltry saving in the interest we’re paying, when the same money invested in a long-term commercial infrastructure project somewhere could earn the taxpayer five or even 10 times as much?

Creating the fund won’t be quick, of course. In fact, it’s better if the process takes a long time – several generations – so the costs don’t fall unfairly on any one particular cohort of taxpayers. But we need to start
now, with a big, bold, strategic decision to take this country forward.

It doesn’t matter if we start small – it’s a multi-generational project after all. And we can do so by handing over things the taxpayer owns already, like our British Business Bank shareholding, or unused land and buildings which we’ve been trying to sell for years; plus the National Fund, a £400 million registered charity set up to pay off our national debt, or even a small piece of the fabled “Brexit dividend” once we’ve left the EU.

But once it’s underway, just think what we will have achieved. We will have built strong economic foundations, so we can invest more for the long term and deliver faster growth and extra jobs. We will be able to afford stronger and better public services. And we will have insulated ourselves against the next economic shock like the last banking crisis.

Better still, we would be a fairer, more generationally just country, because we wouldn’t be immorally saddling our children and grandchildren with unmanageable debts to pay for our lifestyle today. By funding our national debt with a big pool of investments, our children and grandchildren won’t have to break their piggy-banks to pay our IOUs; they’ll have assets to match.

We would be more socially just too because, like those sensible Norwegians, basic- and high-rate taxpayers alike would all own the same, equal personal stake in the fund that underpins their individual state pension and benefits payments. Britain would become an asset-owning democracy on a scale that no other developed nation could match.

So a sovereign wealth fund wouldn’t just tame the deficit. It would cage the debt too. And it would make Britain a generationally fairer and more socially just place, rebalancing our economy so it had stronger and safer foundations than ever before. But best of all, it would mean we’d avoided decades more austerity.


The post-war governments created new institutions like the NHS and the welfare state, which had little relevance to rebuilding homes and cities damaged in the war, but everything to do with forging a new society and a new nation. This is our generation’s chance to do the same.

To rival the post-war generations with our ambition. A new, stronger, more socially just and generationally fair Britain with the financial strength to use our post-EU independence effectively, as an international force for good in the world.

Those post-war leaders like Attlee, Beveridge, and perhaps even Churchill himself, would be proud.

This article first appeared in ‘Britain Beyond Brexit’, a collection of essays published by the Centre for Policy Studies. You can purchase a copy of the book HERE. This piece was written before the writer was appointed to the Government as a Minister. He was writing in a purely personal capacity. 

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John Penrose is the Conservative Member of Parliament for Weston-super-Mare.