RUTH SUNDERLAND: Labour’s £1trillion problem on pension funds

Tough choices: If Rachel Reeves becomes Chancellor she will need to repair the damage done by Gordon Brown

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

Her first Budget is likely to be in October or November, to allow time for the independent Office for Budget Responsibility (OBR) to prepare its report.

It might be sooner – the OBR did offer to produce a quick version for Liz Truss before her ill-fated mini-Budget, only to be rebuffed – and the rest is history.

The backdrop for Reeves is highly challenging. She and Starmer are relying, Pollyanna-style, on growth so they can meet debt targets without either raising taxes even further or slashing public services.

The other option is borrowing more. It’s worth reminding ourselves, though, just how much national debt has mushroomed since the financial crisis and then Covid.

In 2007, it stood at £350billion or just over a third of the economy. That figure seemed plenty at the time but looks paltry beside today’s debt mountain of £2.7trillion or close to 100 per cent of GDP.

Sources close to Labour have suggested to me that in government, Starmer and Reeves want to tackle the blight of ‘economic inactivity’.

There are a shocking 9.4m people who are not working but not officially registered as unemployed, including more than 2.8m claiming to be long-term sick.

This is an albatross on the economy. The Tories have baulked at taking strong measures to encourage people back into employment, perhaps for fear of being seen as the nasty party. Labour politicians, knowing the anger felt by many hard-working voters at this situation, paradoxically may have fewer qualms.

Investment is needed on a vast scale to improve our desperately inadequate infrastructure, including transport, energy and water, which should in turn boost productivity.

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

Fortunately, there is plenty of capital sloshing around that could be funnelled to more productive use: £6trilllion or so in pension funds, ISAs and other investments.

Most of this hoard of capital is not invested to good effect in the UK either for individual savers or the country at large, as the tax and regulatory systems do not favour the home market. Instead, UK pension funds are investing ever-larger amounts in overseas equities.

There is not a quick fix but there are some straightforward steps Reeves could take. These include scrapping stamp duty on share purchases, which would invigorate the London stock market.

She could also make sure plans hatched by Jeremy Hunt for the Great British ISA, with an extra tax efficient savings allowance of £5,000 for UK shares, actually come to fruition.

The Conservatives are ideologically averse to compelling pension funds to invest in UK assets. This free market purism defies common sense as capital drains out of this country. Given the £70billion or so a year of tax breaks for pension saving, it’s not unreasonable to ask them, in return, to invest more in the UK.

Much blame lies at the door of Gordon Brown and his tax raid on pension funds. It falls to Reeves to repair the damage and to incentivise them to invest for the benefit of current pension savers and generations to come.