Growth at All Costs

It’s not without good reason that growth is the keyword for Labour. While many on the left would like to see more government investment, there are real trade-offs and risks associated with the financing of increased government expenditure. The Office of Budget and Responsibility (OBR) is widely expected to confirm that the £9.9 billion financial buffer needed to meet her budgetary rules has been wiped out.

The government can raise taxes and hope that increased expenditures stimulate growth, but from Labour’s point of view this risks losing the support of key segments of Britain’s capitalist class that may be part of their growth machine. Alternatively, Reeves could put pressure on the Bank of England to slow down its programme of quantitative tightening or increase government borrowing, but this would likely spook the bond market – something the government has desperately tried to avoid following the 2022 debt crisis triggered by Liz Truss’ mini-budget.

Alternatively, Reeves could slash public spending on welfare and drastically alienate allies on the left and hurt those reliant on public services to fund increased public investment. Unsurprisingly, this is what the government has decided on. If growth does not pick up, however, then even the right-wing of the party would have no leg to stand on.

Reeves has no choice but to make the NWF work. In March, Reeves told the NWF that ‘growth is this government’s top priority’. She confirmed that the NWF will commit £5.8 billion to green hydrogen, carbon capture, ports, gigafactories, and green steel sub-sectors over this Parliament. Reeves also announced an increase in the NWF’s economic capital limit, lifting it from £4.5 billion to £7 billion in order to participate in higher risk investments.

While the NWF is actually just the organisational successor to the UK Infrastructure Bank, launched in 2021 by then-Chancellor, Rishi Sunak, in October 2024, Reeves announced she was ‘turbocharging’ the UKIB, renaming it the NWF, and expanding its mandate beyond infrastructure to deliver an industrial strategy in areas where ‘an undersupply in private finance exists’.

The NWF’s mandate is also explicitly developmental and environmental. Its investments are guided by a ‘triple bottom line’: tackle climate change and/or support regional and economic growth; crowd-in private capital; and generate a positive financial return. It is also willing to use its sovereign-backed status to invest in riskier projects and fund more volatile stages of sectoral development – areas where private capital is generally unwilling to go.

Reeves has also tried to subtly integrate the NWF’s growth mission into Britain’s growing defence program. In February, Keir Starmer set out plans to increase defence spending to 2.5% of GDP from April 2027. For Labour’s supply-side progressives, European rearmament is an opportunity to fire up the growth agenda. In March, HM Treasury told the NWF that it ‘should consider investments in dual-technologies and to support supply chain resilience across these three priority sectors, to better support the UK’s defence and security’.

Like many other industrial policy programmes rolled out in recent years, the rationale for reviving advanced manufacturing and ramping up clean energy is often bound up in national security concerns. It’s proved to be an effective form of coalition building. But it’s worth being clear-eyed about the implications of tying up growth efforts with defence: namely, empowering the hawkish elements of any political party. For the NWF, the quest for growth, especially if the source of which lies in defence, risks drifting the fund away from its original mission.

The Dangers of Relying on Private Capital

Key to the success of the NWF – and the government’s wider growth agenda – is the mobilisation of private capital. Because of Labour’s commitment to tight fiscal rules, the fund hopes to mobilise private capital at a rate of 3:1 – that is, for every pound of public capital spent, the fund would aim to ‘crowd in’ three pounds of private capital, ‘unlocking’ £70 billion in private finance. Undoubtedly, private capital will be necessary for any green transition in a capitalist economy. But by constricting their own fiscal space, the government has effectively tied their hands and declared that prioritising private capital is the only path to decarbonisation.

This dependency on private capital is problematic for two main reasons. First, the NWF will likely be dedicating most of its efforts to de-risking projects (subsidies, price assurances, revenue guarantees, etc.), making them financially profitable for private investors. As the 2024 NWF Taskforce report notes, ‘returns will occasionally be asymmetric, favouring the private sector’. While derisking is essential to addressing issues such as demand uncertainty, high capital costs, and investment viability, the government will be essentially paying the private sector to build and provide services that it won’t provide itself, rewarding private investors in the process.

But it’s not even clear that substantial de-risking will get the private sector out of bed, especially at a ratio of 3 to 1. With regards to the UK’s pension funds’ appetite for risk, one industry expert noted that ‘the thing with these industries – hydrogen, gigafactories – is that they’re not necessarily commercial. A lot of these businesses in Europe are still applying for grant funding’. In fact, according to the 2023–2024 annual report, the NWF invested £1.62 billion in 18 projects and ‘crowded-in’ £2.27 billion, yielding a ratio of roughly 1.4 – far below the target they are aiming for.

That’s not necessarily problematic in and of itself. But favouring private capital will most likely entail sacrificing ambitious public goals from the offset. For example, the current job-creation statistics are not particularly glowing. An IMF working paper estimates that USD 1 million of public spending in infrastructure in advanced economies creates 3–7 jobs.

Using the conservative end of this benchmark, we would expect that the total deployment of £3.89 billion (USD 5.04 billion), from both the NWF’s investment and privately crowded-in capital, would create approximately 15,000 jobs. However, the NWF estimates that the total number of jobs created or supported from these investments was 9,516. This may change, especially as the NWF develops and matures over time, but the emphasis on private finance may signal where the Treasury’s priorities lie.

A more progressive approach would have the NWF use its sovereign-backed status to offer concessional debt, early-stage equity financing, or price guarantees to firms on the condition that they create unionized jobs or meet strict decarbonisation targets, for example. Or as a recent report from the New Economics Foundation suggests, the NWF can issue its own bonds on the private bond market. Because Reeves changed the way the UK government’s debt rules are calculated, taking into account the government’s financial assets and liabilities, the NWF is not constrained by the government’s fiscal rules. ‘This means that the NWF’s budget can be expanded without directly reducing the government’s fiscal space’, the report notes. This would provide the fund with more operational independence and leeway to make suitable investments, while also not kowtowing to the demands of specific private investors.

But by catering to private investors at the project level, the NWF would have to prioritise other objectives to ensure ‘market credibility.’ In turn, the fund risks adopting a myopic view of green development projects: prioritizing financial viability and satisfying investors’ preferences rather than meeting public needs.

Trade Unions Left Out

The Labour Party has gone out of its way to campaign on a business-friendly platform. Ahead of the 2023 World Economic Forum in Davos, Reeves declared that ‘with Labour in government, Britain will be open for business’. This is approach was most evident in the make-up of the NWF taskforce responsible for advising Labour. Participants included chief executives from Aviva, NatWest, Barclays, and the former bank of England, Mark Carney. In fact, the chair of the taskforce, Rhian-Mari Thomas, noted that it has been developed ‘closely with business and finance’, and ‘informed by people in private capital markets’.

The taskforce’s report explicitly centres on meeting the needs of three constituencies: investors, government, and industry. To be sure, developmental coalitions often involve partnerships between government and the private sector. But such coalitions need not exclude labour unions – especially for a party with deep ties to the trade union movement. Although TUC General Secretary Paul Nowak has welcomed the creation of the NWF, unions should push to be active participants in the fund. Labour could ensure that trade unions are represented on the board, or at the very least, are represented through some sort of informal advisory mechanism.

Having trade unions participate in decision-making not only empowers the labour movement and ordinary workers, it can act as a political guardrail against investments becoming a source of unproductive rent-seeking for the private sector. While much has been made of the government’s role in shaping the NWF, it’s important to remember that consultation goes both ways. As the NWF annual report notes, it provides its expertise in ‘setting a clear and prominent role for the Company [NWF] in government strategies’ and ‘contributing to market intelligence and expertise to shape policy decisions’.

As Max Weber long ago remarked, the power of the expert or trained bureaucrat can overshadow that of the politician. If the NWF is to act as a key broker of both information and expertise, interfacing between private capital and the state, having trade union representation at the NWF is one way of ensuring that the labour movement is actually folded into the domain of economic expertise. In fact, there is much evidence to suggest that developmental policies are more effective, balanced, and likely to succeed when there is buy-in from broad-based coalitions.

Financiers with Public Values?

To manage the fund, the taskforce recommends appointing personnel with private sector investor expertise and market credibility. They go onto suggest that ‘pay constraints must be relaxed to enable the calibre of appointment required … establishing a culture which enables and encourages risk taking’. The NWF will effectively be dipping into a labour market that caters largely to private financial institutions – private equity, investment banking, asset management, etc.

In the short-run, there probably isn’t much of an alternative. The goal of crowding in private capital and building market credibility will likely require recruiting top talent from the private sector. But those in government should be aware of the potential mismatches between private sector expertise and public sector demands. Risk-taking in the private sector is very different from risk-taking in the public sector.

Investment professionals will also need to be intimately familiar with the requirements of green industries and operate with longer time horizons in mind. Moreover, having bonuses tied exclusively to financial returns may reward actions that ultimately undermine the fund’s stated goals. Instead, their compensation could be tied to both financial returns and decarbonisation or job creation-based metrics, for example.

In the long-run, however, those inside and outside of the Labour Party should work to develop a cohort of economists, financial analysts, and investment professionals dedicated to state-led development and economic planning. Financial professionals with public sector experience and values may better understand and interpret a developmental or environmental investment mandate than their private sector counterparts. And if the eventual goal is to socialise investment and finance, the left will make little headway by relying on expertise that lies squarely in the private sector.

Ultimately, the NWF is a welcome development and an important building block. Given the continuing ecological crisis, inequality, and stagnant growth in the UK, the state must play a central role in driving the green transition. And within the constraints of a capitalist economy, the state should aim to weaken private capital’s control over investment decisions. While the NWF doesn’t do nearly enough in this regard, it provides a possible template for further action.

If shows like HBO’s Industry make it painfully clear that the men and women who populate the world’s largest investment banks and asset management firms are woefully ill-suited to solving the climate crisis, the state will have to think more deeply about getting out of this bind. Decisions around financial investment best be brought into the terrain of politics and directed towards meeting human needs.