Today is a big day for Rachel Reeves as she prepares to woo international investors by announcing more details about Labour’s green industrial strategy at the showpiece International Investment Summit. The government’s new national wealth fund (NWF) is the lynchpin of this strategy, so it is vital it is empowered to leverage private funding if the Chancellor wants to bring in the big bucks.

Before we jump into the technical side, I want to emphasise the real-world significance of what’s on offer here. Talking about bonds, equity ratios, and fiscal rules can seem like a dry, technical conversation reserved for policy geeks. But what’s at stake is the opportunity to create tens of thousands of new jobs, to develop homegrown and sustainable British industries in left-behind places, to bring down energy bills, and to make a huge leap in fighting climate change and reversing our destruction of the natural world.

Now, back into the details.

Rumours have it that the Chancellor is considering several options for a change to the measure of debt targeted in the fiscal rules. The options reportedly on the table would all be a big step in the right direction towards increased public investment, and each of them comes with economic and political pros and cons. At NEF, we continue to argue that ultimately, we should move towards a system of ​“fiscal referees”, where decisions are based on a comprehensive assessment of economic logic and fiscal responsibility, rather than shackling ourselves to arbitrary targets on a particular metric. In the meantime, there is an extremely important policy implication which is being overlooked in the debate about fiscal rules and increased public investment.

The minimum common denominator of whatever change is made should be that the liabilities1 of the new NWF are effectively removed from the measure of debt targeted in the fiscal rules. This would be the case whether a specific exclusion is made that removes the NWF from the current measure (Public Sector Net Debt excluding the Bank of England) or whether the measure is switched to something like Public Sector Net Worth, in which case the NWF’s positive assets would effectively cancel out its liabilities.

But this is not enough in itself. To make a genuine impact on British industry the NWF must be empowered to issue its own bonds. Following the change in the debt measure, NWF bonds would have no effect on the overall level of national debt targeted in the fiscal rules. Issuing bonds is the only way for the NWF to achieve its full potential to leverage £14bn of private funding for every £1bn this government puts in.

This statistic comes from a direct comparison with Germany’s state development bank, KfW. The KfW is allowed to issue its own bonds and can also take out private sector loans. It has an equity ratio2 of 6.8%, which equates to leveraging €13.7bn of private sector funds for every €1bn of government capital. The UK would be shooting itself in the foot not to follow Germany’s example and allow the NWF to bring in private funding — it is a rare case of a policy no-brainer.

Empowering the NWF to issue its own bonds must happen as soon as possible to have an impact within this parliament. It could take up to 10 years for the NWF to sell enough bonds to ramp up towards a similar equity ratio to the KfW. Moreover, it would likely take at least a year to complete a credit assessment and set up the first sale of the bonds. If the policy change were to happen by the end of 2024, and the credit assessment took place over the course of 2025, then the first bonds could be sold in 2026, meaning that by 2027 – 8 there could already have been a major surge of private investment and a tangible effect on people’s lives.

A financially empowered NWF is vital if this government wants to deliver a transformative green industrial strategy. As well as supercharging the priority sectors identified in the NWF Taskforce’s report (green steel, green hydrogen, decarbonising industry, gigafactories, and ports), issuing NWF bonds would allow the expansion of existing programmes such as the UK Infrastructure Bank’s lending to local authorities.

The Labour Party had a commitment in its manifesto to target a ratio of three pounds of private investment for every one pound of public funding via the NWF. Allowing it to issue its own bonds (after removing its liabilities from the fiscal debt target) is a policy lever that would allow it to achieve a ratio approaching fourteen to one. So pull the lever!

Note: For simplicity, ​“NWF” is used here to refer to the proposed consolidated policy bank consisting of at least the NWF, UK Infrastructure Bank, and British Business Bank.

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