Introduce a National Wealth Fund

The detail below lays out the thinking behind this idea, which was inspired by the example of Norway, who have a fund of over $1.5 trillion, which is roughly equivalent to the UK's total annual tax receipts, but ten times that of Norway. A UK equivalent fund would be around £12 trillion, which at an average 5% return would generate £600m of income. Many other major countries have investments: China, Singapore, UAE, Saudi, Kuwait, Australia and the United States are some examples that hold funds of one type or another, although most of these funds are much smaller relative to their individual GDPs, and not necessarily held for the same purpose.

The National Wealth Fund would need to be a long term policy, with limits on any withdrawal of interest and very strict limits on any withdrawal of capital, so would qualify as a Protected Policy if adopted.

Overview of our Proposal

Current Situation

Despite NICs being collected under the guise of being ring-fenced for state pension payments, everyone is now aware that NICs basically pay current pensions, and none is set aside for future pensions.

With an aging population there is a smaller percentage of people in work and a larger one collecting pensions, which has created a shortfall in funding, and led to recent pension reforms that increase the state pension age.

The UK does not hold any significant long term investments to generate passive income which could offset tax receipts or protect against future financial shocks.

Proposal

The SPP would create a National Wealth Fund invested in national and international markets, funded through windfall taxes, donations, unclaimed estates, unclaimed National Lottery winnings, some of the profits from nationalised services, and financial penalties levied on businesses and individuals in breach of certain laws and regulations and/or guilty of tax evasion.

Over time, the size of this fund would grow, with income from it used to either fund additional public spending, reinvest in the fund, reduce borrowing and interest costs, or offset the amount of tax to be collected.

Restrictions

The fund would need to be included as one of the Protected Policies to ensure no opportunistic raiding of the capital to fund tax giveaways or politically motivated projects.

The fund capital would have very heavy restrictions and strict qualifying criteria on any draw down.

The passive income generated by the fund would also have restrictions on use, but these would be more flexible.

The management of the fund would need to be handled by politically independent expert advisors with limits on inappropriate investments and trades.

Impact

The proposed National Wealth Fund would have very little impact in its early years, as by its nature it is a long term, future focused policy.

If we were to add £250m of capital each year with no withdrawals, then after ten years (with an average return of 5%), the fund would be at £3.3bn and generating £165m p.a. in income. After 20 years, these would be £8.7bn capital and £434m in annual income; in 30 years, it would be £16.6bn and £872m.

In 50 years it would be worth £55bn and generate interest of £2.7bn, but would have cost us only £12.5bn in contributions.

Obviously it would be highly unlikely that all the annual interest would have been reinvested, but this does show the power of long term returns. In a more plausible scenario of only half the interest being reinvested each year, after 50 years the fund would be at £25.6bn, with annual interest of £1.3bn, but it would have also have paid out £13.1bn of interest over the period (which, net of the annual £250m contributions, means that the fund cost nothing - it has actually paid out £590m more than we paid in, but is still worth almost £26bn).