The new Government’s mission to achieve stronger and sustained economic growth in the UK will require substantial mobilisation of private capital which it will hope to crowd-in through the new National Wealth Fund (NWF). Geoff White, Colin Warnock and Peter Tyler argue that a new fiscal incentive – applied to Local Growth and Renewal Zones – could help harness private wealth to deliver growth in areas of high need and low opportunity.
Strong and sustained growth of the UK economy is the new government’s over-riding mission. It will try to lay down stable policy foundations through a long-term industrial strategy and a 10-year infrastructure strategy, all aligned with Local Growth Plans.
Substantial capital investment will be needed to achieve this. Given public spending constraints and the current fiscal rules, tapping into private investment funds will have to be the primary mechanism by which growth can be boosted and sustained. A recent report by New Financial estimated there to be up to £5.6 trillion of long-term capital available from pensions, insurance, direct retail investment and endowments, the biggest and deepest pool in Europe. And yet it remains largely untapped. UK pension funds, for example, allocate just 7% of their assets to property, to property, private equity and infrastructure investments compared with 19% in the countries with the largest pension markets.
The recently announced National Wealth Fund (NWF), to be aligned with the UK Infrastructure Bank and the British Business Bank, will aim to use public sector investment to crowd-in private sector institutional capital funds and facilitate their deployment in growth-generating investment projects.
Government investment of £7.3bn is estimated to be able to mobilise private capital from institutional investors at a leverage ratio of 3:1, implying total investment of around £29bn. Spread over a five-year Parliamentary term this amounts to nearly £6bn a year. Some commentators think this shows that the NWF lacks ambition given the institutional funds available.
The NWF announcement also makes it clear that the initial focus will be on the UK’s transition to a low carbon economy. The report of the NWF Taskforce focused on the “priority sectors” of green steel, green hydrogen, industrial decarbonization, gigafactories and ports.
Crowding-in private funding, with minimum displacement of other investment projects and avoiding projects that would have gone ahead in any case, is more likely in certain contexts where economic capacity is under-utilised. We suggest these conditions are more likely to prevail in left behind places. But, while it seems plausible that some proportion of the NWF’s green investments might be located in areas which have traditionally lagged behind the UK average in GDP per capita terms, there is currently no explicit spatial dimension to the NWF. As currently configured, the NWF’s ability to tackle spatial inequality will be co-incidental, not by design. Specifically addressing the UK’s long-standing spatial inequalities will need to go beyond the net zero focus and will require substantially more resources.
The NWF proposals do allude to a medium-term ambition to “crowd-in fund-level capital” which should include attracting wealth from individual investors. The UK’s tight fiscal position makes it seem that an early target for revenue raising by the new government could be Capital Gains Tax (CGT) to bring in additional tax revenues to support public service delivery.
Should any changes to CGT or other wealth taxes feature in the Autumn Budget 2024, there would be an opportunity to “sweeten the pill” by offering the ability for wealthy individuals to write down, or even write off, future CGT liabilities from long-term investments in the UK’s left behind places. For beyond institutional investment, there is a significant pool of private wealth that could be tapped, and there is experience in both the UK and the United States (US) of how this could be done and targeted at left behind places.
This is the Opportunity Zone (OZ) model that has been rolled out across the US. Recent evidence suggests that OZs have directed significant flows of private wealth from individuals to Opportunity Zone Funds, making eligible investments in low income and high poverty areas. They have achieved rapid and expansive geographic reach, large-scale private investment, and significant economic effects claimed to be unique in the history of U.S. place-based policy.
The UK has its own long history of using tax-based incentives to attract funds from private individuals to deprived areas. From the 1980s onwards, Enterprise Zones (EZs) successfully attracted private wealth into commercial property through Enterprise Zone Trusts (the Final Evaluation, published in 1995 estimated the leverage ratio was 2.3:1[1]). Enhanced capital allowances and other tax incentives have also been used more recently on Investment Zones and Freeports. There are also recent examples of local authorities combining zone based tax incentives with Tax Incremental Financing models to successfully restructure their local economies.
Designating Local Growth and Renewal Zones (LGRZs) in left behind places
Drawing on this experience and evidence, we propose the establishment of Local Growth and Renewal Zones (LGRZs), designated in target left behind places across the UK to support the delivery of the Government’s national growth and net zero missions.
We suggest that, to maximise transparency and simplicity, eligible left behind areas for LGRZ designation – i.e. those experiencing high need and low opportunity – should be based on income deprivation as evidenced by each nation’s latest indices of multiple deprivation. Designation of the Zones from eligible areas would be driven bottom-up by the institutional arrangements in place for local growth planning in each of the devolved nations. In England, the designation of LGRZs would be through the ten-year Local Growth Plans (LGPs) developed and delivered in localities according to the local devolution arrangements in place.
The LGPs will themselves be aligned with national industrial strategy priorities which, in turn, will align with the government’s growth and net zero missions. In this way, designation of LGRZs within LGPs would make a clear and direct contribution to attainment of the Government’s missions.
Private sector funding for eligible investments in LGRZs would on this model come from individuals and organisations looking to shelter their investment from future capital gains tax liabilities. In return for sustained investment in specified assets in LGRZs they would have the ability to write-off their capital gains tax liability from these investments partially after seven years and fully after 10 years.
The NWF would be the natural intermediary for funding eligible LGRZ investments. This would enable investment from individuals to be blended within the NWF alongside pump-priming investment from government and that from pension funds and other sources.
Conclusion
The UK should learn from its extensive experience with fiscal incentives and zoning policies, as well as the more recent US OZ experience, to develop a new CGT-based fiscal incentive that would bring additional flows of investment and additional economic benefits to the United Kingdom’s left behind areas.
The NWF could create a series of “LGRZ Funds” to attract investment in qualifying projects located in LGRZs (for example laboratory, manufacturing or office floorspace, or equity in LGRZ businesses in key sectors or their supply chains). This would ensure that a proportion of the National Wealth Fund was deployed in a way which, through LGPs, was both aligned with the national missions and industrial strategy and had a clear focus on the most left behind places. The NWF could also choose to require LRGZ investments to have conditionality attached to further maximise their public value to those areas and more widely, e.g., through enhanced environmental performance of business premises, or increased investments by the supported businesses in innovation and skills.
The Government has been commendably quick to demonstrate its commitment to mobilising private sector capital through the NWF. A mission for “growth everywhere, for everyone” gives clear national purpose, but will not in itself tackle spatial inequality. With the NWF’s overall architecture now clear, there is the potential to boost private capital mobilisation further and give it a clear spatial dimension by ensuring that more growth-focused investment is targeted at the most left behind places.
[1] Final Evaluation of Enterprise Zones, PA Cambridge Economic Consultants, HMSO 1995.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
