29 January 2025
If you are covering Chancellor Rachel Reeves' speech on the government's plans for growth, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
Oxford-Cambridge Growth Corridor
"The Chancellor’s pledge to create a 'Silicon Valley of the UK and Europe' between Oxford and Cambridge is ambitious. Cambridge University's proposal for a new large-scale innovation hub in the city centre, which Reeves declared as the world's leading science and tech cluster by intensity, marks a significant step forward. Additionally, the new growth commission for Oxford, the planned reservoirs near Oxford and Cambridge, and the improved rail links in the area are all positive developments.
"However, it is questionable whether there is the necessary scale, funding and skills to truly become Europe's Silicon Valley. Silicon Valley offers tech companies unparalleled growth opportunities due to access to vast venture capital funding, a cluster of skills, and the sheer scale of the US market. Replicating this in the UK will be extremely challenging, so there is a very long and winding road ahead.
"Scale is crucial in economic development. Start-up ecosystems thrive in environments that attract risk-takers, who may fail but then move on to new opportunities, and larger hubs should create better environments for risk-taking. To improve entrepreneurial activity in the UK, we need to scale up, including in research and innovation investment. While our university system is efficient in turning research and development expenditure into spinout companies, without a new trade deal to further open up the European market to these firms, these companies may face limits on their ambitions.
"While this plan is certainly a step in the right direction, in order for it to work there must be sufficient backing that not only enables start-ups to thrive, but encourages them to stay put and further develop in the UK as opposed to listing abroad as we have so often seen.
Pension surpluses:
"In today’s speech, Rachel Reeves confirmed a bold plan to unlock billions of pounds in surplus funds from defined benefit (DB) pension schemes. This idea builds on previous government efforts and aims to use these surpluses to fuel economic growth by investing in key infrastructure projects and productive assets.
"The concept of surplus extraction isn’t new; it was discussed as part of the government's Mansion House reforms and was considered a way to redirect funds from overfunded pension schemes to support broader economic needs. However, the challenge has always been to strike a balance between unlocking these funds for growth and ensuring that pension members' benefits are protected. With Labour's backing, there is now a clearer focus on identifying eligibility criteria for schemes to release surpluses without jeopardising the financial security of retirees.
"While some surplus extraction has been possible in the past, the actual amounts taken have been relatively modest, partly due to statutory restrictions on pension scheme rules. Reeves’ proposals aim to address these concerns by offering more clarity and guidance for trustees, giving them the confidence to release funds without compromising members' future pensions.
"The potential benefits of unlocking these funds are clear. Not only could it provide vital capital for infrastructure projects that could stimulate economic growth, but it could also allow pension schemes to achieve better investment outcomes. However, the success of this proposal will ultimately hinge on whether trustees feel sufficiently reassured that the extraction will not negatively impact members' benefits. Without this reassurance, the unlocking of surpluses could remain limited, despite the promising potential for economic growth.
Airport development
"Today’s speech has also seen the re-emergence of plans to expand various UK airports, including Heathrow. It is debatable whether these airport developments are the right short-term target for growth and solving the UK's productivity puzzle, and it is likely to spark strong opposition. These would no doubt be long-term projects which could take upwards of a decade to complete, and we could wait even longer for any real economic impact. There also appears to be no public funding to help spur on the plans, and the approval process could be another hurdle.
"Instead, the focus should be on upskilling the labour market and improving labour mobility through both the tax system and planning measures."
