RUTH SUNDERLAND: Labour’s £1 trillion challenge to pension funds

Assuming Rachel Reeves becomes Number 11 this week, Britain’s first female chancellor will face a task as tough, if not tougher, than most of her male predecessors.

Her first budget is likely to come in October or November to give the independent Office for Budget Responsibility (OBR) time to prepare its report.

It could have been sooner – the OBR offered to produce a quick version for Liz Truss before her ill-fated mini-Budget, but was turned down – and the rest is history.

The background for Reeves is very challenging. She and Starmer, Pollyanna-style, are banking on growth so they can meet debt targets without raising taxes further or cutting public services.

The other option is to borrow more. However, it is worth reminding ourselves how large the national debt has become since the financial crisis and then Covid.

In 2007, this was £350 billion, or just over a third of the economy. That figure seemed adequate at the time, but seems paltry next to the current debt mountain of £2.7 trillion, or almost 100 percent of GDP.

Sources close to Labor have told me that Starmer and Reeves in government want to tackle the scourge of ‘economic inactivity’.

There are as many as 9.4 million people who are not working but are not officially registered as unemployed, including more than 2.8 million who claim to be ill for a long period of time.

This is an albatross for the economy. The Tories are reluctant to take strong action to get people back to work, perhaps for fear of being seen as the annoying party. Labor politicians, knowing the anger that many hard-working voters feel about this situation, may paradoxically have less difficulty.

Massive investments are needed to improve our desperately inadequate infrastructure, including transport, energy and water, which in turn should increase productivity.

According to the former boss of Legal & General, Sir Nigel Wilson, who has been an energetic speechmaker on the pre-election circuit, we need to invest an extra £1 trillion over the next decade to grow the UK economy by 2-3 per cent in real terms.

Fortunately, there is plenty of capital in circulation that could be channelled to more productive uses: some £6 trillion in pension funds, ISAs and other investments.

Most of this capital stock is not invested to good effect in the UK, either for individual savers or for the country as a whole, as the tax and regulatory regimes do not favour the home market. Instead, UK pension funds are investing increasing amounts in foreign equities.

There is no quick fix, but there are some simple steps Reeves could take. These include abolishing stamp duty on share purchases, which would boost the London stock market.

She could also ensure that Jeremy Hunt’s plans for the UK ISA, with an additional tax-efficient £5,000 savings allowance for UK shares, actually become a reality.

The Conservatives are ideologically averse to forcing pension funds to invest in British assets. This free-market purism defies common sense as capital drains from this country. Given the £70bn or so a year in tax breaks for pension savings, it is not unreasonable to ask them to invest more in Britain in return.

Much of the blame lies with Gordon Brown and his tax attack on pension funds. It is up to Reeves to repair the damage and encourage them to invest for the benefit of current pension savers and future generations.