Growth
·
Investment

Much ado about PuFins

How the UK’s public financial institutions can unlock billions for investment

Elliott Christensen
Elliott Christensen
Sophie Hale
Sophie Hale
Stephen Hunsaker
Stephen Hunsaker
David Willetts
David Willetts

This briefing note examines the UK’s public financial institutions – affectionately nicknamed the ‘PuFins’ – and asks whether they could help the new Prime Minister, Andy Burnham, square his commitment to the existing fiscal rules with his promise of a higher-investment economy.

In a little over a decade, successive governments have built – and rebuilt – a set of institutions that use public money to provide loans, equity investments and guarantees to the private sector. These bodies have moved towards the centre of economic policy as demand for a larger government role in boosting investment has grown – driven by the UK’s departure from the European Investment Bank, a renewed focus on industrial policy, and greater recognition of the UK’s chronic underinvestment. The Starmer Government has already almost doubled the balance sheet capacity of its largest PuFins. But the rewrite of the fiscal rules in October 2024, which shifted the debt target to Public Sector Net Financial Liabilities, gives the financial assets that PuFins acquire more favourable accounting treatment than conventional capital spending, making them a particularly important channel for raising investment further.

The new Burnham Government should seize this opportunity by channelling extra capital to the National Wealth Fund, in the first instance. Matching the European Investment Bank’s pre-referendum scale of operations would mean boosting the National Wealth Fund’s investments by £16 billion over the next five years. This would come at a direct cost of around £400 million a year in debt interest, though that is before accounting for the returns those financial assets would generate. One thing the Prime Minister should resist is asking PuFins to issue their own bonds, which would cost around 10 per cent more than funding them through gilts, with no more favourable accounting treatment in return.

Key findings

  • The Starmer Government has already expanded the balance sheet capacity of four PuFins – the British Business Bank, National Wealth Fund, UK Export Finance and the newly created National Housing Bank – by over £100 billion, taking their total capacity to nearly £200 billion.
  • Despite a recent £5.8 billion uplift for the National Wealth Fund, in real-terms, the NWF’s capacity is not much larger than that of its predecessor, the UK Infrastructure Bank, at its inception in 2021. While these resources now must be stretched across a far wider remit.
  • The National Wealth Fund remains a much smaller investor than its predecessor, the European Investment Bank. In the decade since the 2016 referendum, the UK has lost out on over £80 billion of investment in real terms. And even after the recent expansion the National Wealth Fund is still expected to invest 70 per cent less over the five years to 2030-31 than if the European Investment Bank’s pre-referendum scale of operations had applied – a cumulative real shortfall of £30 billion.

Recommendations

  • Andy Burnham can, and should, expand financial transactions to scale up investment and boost growth – but any expansion should pass three tests: investments must be truly additional (ideally catalysing further private investment); there must be sufficient unmet demand from projects with adequate returns; and the broad benefits must justify the short-term fiscal costs.
  • Focus extra capital on the National Wealth Fund first, by ramping up its capacity to match the 0.27 per cent of GDP that the European Investment Bank invested pre-2016. This would boost its investment by nearly £16 billion over half a decade, at a direct cost of around £400 million in annual debt interest after three years – though returns on the assets acquired are expected to offset this over time. Indeed, the NWF received £70 million in interest on its existing loan assets in the last financial year.
  • Resist calls for PuFins to issue their own bonds, which would take time and add unnecessary debt interest costs. Funding the £45.9 billion loan and equity capacity of the National Wealth Fund, British Business Bank and National Housing Bank this way could add £230 million to borrowing costs – a 10 per cent increase – with no offsetting improvement in accounting treatment.

Further reading

Much ado about PuFins
How the UK’s public financial institutions can unlock billions for investment
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Elliott Christensen, Sophie Hale, Stephen Hunsaker, David Willetts
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Nye Cominetti, Julia Diniz, Lindsay Judge, Imogen Stone, Greg Thwaites
See it. Say it. Sort it.
How to reset Britain’s economic policy
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Matthew Cavanagh, Alex Clegg, Ruth Curtice, James Smith

https://doi.org/10.63492/seu4444

Elliott Christensen
Elliott Christensen Senior Economist
Sophie Hale
Sophie Hale Research Director
Stephen Hunsaker
Stephen Hunsaker Economist
David Willetts
David Willetts President