100 Policies to End Austerity #5: A National Investment Bank
PEF Council member Professor Stephany Griffith-Jones outlines the need for a National Investment Bank to revitalise the UK economy.
Creating a national investment bank would be key to a major reform of the UK financial sector. It is needed to help support increased investment, which is essential to help make the UK economy more dynamic, fairer and greener.
As a publicly capitalised institution, the national investment bank would be an important element of Britain’s financial system. It would lend to – and invest in – private companies and public bodies, while co-financing with private banks and investors. Small and medium-sized businesses will be major beneficiaries, especially those more likely to innovate and grow. And it will expand finance for key sectors such as renewable energy, which are presently insufficiently funded by private finance.
After the 2007-08 financial crisis, the UK financial sector significantly reduced its support in financing private investment. This was due in large part to austerity measures imposed by the Conservative government, which discouraged private investment as a result of reduced growth. By cutting public investment, so often complementary to private investment, it further discouraged the latter.
The UK has an incredibly low share of total investment relative to its GDP. At only 16.7%, it was the lowest of all G7 countries in 2016. It was also the lowest of 34 mainly OECD countries in the period 1997 to 2017.
Low levels of investment in the UK are a major cause of low increases of productivity, contributing to the weaker growth of wages and living standards for the majority of people.
The purpose of the national investment bank would be to increase lending and investing in sectors that are key for the country’s structural transformation. As well as important infrastructure such as transport and health services, it could help lay the groundwork for a greener economy. It would also provide lending to underfunded creditworthy SMEs which, given that they make-up the majority of UK businesses, are so central for generating jobs.
Launching a national investment bank
In order to achieve a significant loan volume, the national investment bank would require an estimated equity of around £40 billion, which would mainly comprise capital paid in by the government. But it may well see a return on this if the bank profits from its transactions after lending commences. These profits could then be reinvested into the bank as equity, enabling it to continue expanding its lending volume, without the need for further injections of capital from the government.
This is what happens with institutions such as KfW – the German government’s development bank – and the European Investment Bank. An ideal way forward, to achieve high levels of loans soon, is to put significant capital upfront – for example £10 billion a year for four years.
There is a very strong case to be made that, in the UK, future loans made by the national investment bank should not be counted as part of the government deficit target, nor towards public debt. Again, this would be similar to the practice already followed for KfW in Germany. A clear economic rationale is the fact that these loans would be channelled to growth-promoting investment. So they may reduce, and certainly not increase, future debt burdens when debt is measured as a percentage of GDP.
It is important to stress that though the UK national investment bank would be publicly owned, (as the government would provide the initial paid-in capital), it could fund its operations on the national and international private capital markets. Furthermore, it could co-finance many of its operations with private lenders and investors.
Serving the real economy
The UK national investment bank would operate in close collaboration, rather than competition, with the private financial and non-financial business sector. Though publicly owned, it could fund its operations through private capital markets and co-finance operations with private lenders and investors. Thus, with relatively scarce public resources committed as paid-in capital, it could catalyse lending and investment on a far larger scale than its public contribution. This is especially valuable for a government committed to major structural transformation of the UK economy. Making it more dynamic, greener and fairer requires significant investment.
Public development banks are more effective at serving the real economy, as that is their main aim – rather than that of solely pursuing short-term profits. National development banks have been an important feature of financial sectors of most developed and emerging economies – especially the most successful and dynamic ones, including Germany, China, India, South Korea, India and Japan. The UK has been an exception in not having such a public development bank, despite its evident need.
The establishment of a national investment bank will help end austerity because it will create the next generation of technology, infrastructure and services that will lead to a fairer and greener economy in the medium to long term. In the short term, it will provide a much-needed boost to investment, leading to higher aggregate demand, and overall increased production.