The Investment Summit Didn't Defuse the Debt Time Bomb. Recession Looms

Rehashing Previous Announcements Is Simply a PR Stunt. The UK needs its economy sorting and substantial investment in infrastructure.

The great “Invest in the UK” summit was deemed a success by its own navel-gazing PR campaign; I guess that’s all that matters. Of course, like every headline this (and previous) governments have promulgated, the detail destroys the headlines. I was initially very sceptical that anything new would be achieved for the simple fact that, as any corporate financier will tell you and any house vendor knows, closing a deal takes an awful lot of time. Deals aren’t done until the money has moved, and for sure yesterday’s boondoggle didn’t result in the transfer of £63 billion, as claimed in the government’s press release.

As the release itself points sour, some of these funds were already committed, some are dependent on planning consent, some will draw down over 5 or more years and so on. It’s BS PR. As the Telegraph has unearthed, the Macquarie investment was previously pledged under the Johnson government. I could go on but life is too short. Pledges are cheap.

It is notable that many of the pledges are for green energy projects. Indeed, the  Executive Chairman of Iberdrola, owner of Scottish Power, Ignacio Galan CBE confirmed on Friday that the UK has become their largest Investment destination and they’re putting another £12 billion into offshore wind developments. Last year the strike price for wind was set low, (£44 per MWh) and no-one bid. This year the price was £52/MWh and investors piled in. Why? Because they can make an easy profit. Who pays? You, me and (especially) industry, who don’t benefit from the price cap. The very fact that Iberdrola, a Spanish company, is doubling its investment in UK wind demonstrates that UK wind is highly profitable. Once again Mad Ed Miliband’s green obsession is exporting wealth from the UK while driving up the UK’s cost base; we have some of the most expensive electricity in the world.

Many of the alleged new investments were in building data centres for AI (the current deus ex machina for many government departments). Data centres consume vast amounts of electricity (needed primarily to shuffle electrons around the silicon chips and to drive the air conditioning). Goldman Sachs reckons that data centre demand is around 1 to 2% of global electricity demand. London’s data centres alone use nearly 1GW, almost 3% of all electricity consumed in the UK. Yet in a couple of years we will have lost all our nuclear power stations, bar Sizewell B. Today they currently, reliably, generate 5.6GW, or 15% of our average demand. Where will the electricity come from to run the massive AI data centres that the government PR machine thinks are the solutions to our problems?

Miliband is proposing lots of hydro-electric dams in Scotland. That’s not going to come online for a while. The Chinese, not renowned for environmental sensitivity or tolerating dissent, took 17 years to build the three gorges dam. The more modest  Lochaber Dam took five years to build back in 1924. (That’s the construction time. It was sanctioned by Parliament in 1921 and there must have been a fair amount of preliminary work before that). It generates around 90MW (or 0.09GW). Lots of glens are going to become lochs and that’s not going to deliver power for a decade.

Amusingly in his conversation with the Prime Minister Eric Smith (the former Google CEO) made the point that AI won’t work without electricity. Google has taken control of the problem, buying six or seven Small Modular (nuclear) Reactors (SMR) to power its US operations. Our Prime Minister yapped about cutting red tape; Smith was too polite to ask how much he’s cut in 100 days. Yet it is precisely British red tape that has caused so may delays to the Rolls Royce SMR, first announced in September 2017. In a sorry, but typical tale of British infrastructure development, government delays have led Rolls Royce to scale back plans. There are now rumours that Rolls Royce may sell its SMR operation, which needs more funds to continue. Those funds would be easy to find if there was a clear government path to adopting the desperately needed Rolls Royce SMRs, but there isn’t. There are just mangled words from the over-promoted (but very well dressed) apparatchik occupying 10 Downing Street.

A simpler infrastructure requirements awaiting a government decision is the expansion of the Dartford Crossing. This is the route that conveys traffic from South of the Thames to the midlands and the north. South of the Thames includes all the Channel ports and parts of the port of London. The original tunnel was opened in 1969, the second tunnel in 1980 and the QE bridge in 1991. The crossing was designed to take 135,000 vehicles per day; it routinely has 180,000. The need for further extension has always been obvious. First proposed in the late 2000s, the Lower Thames Crossing went into planning in 2020. That application was withdrawn and a new one submitted in 2022. It’s still there. Last week our inept Transport Secretary, Louise Haigh postponed a decision until May 2025. Meanwhile the traffic piles up, goods vehicles are delayed and costs mount. That’s entirely because of the red tape the Prime Minister says he’ll remove.

Any investor, either at the summit or (like Elon Musk) with better uses of their time, can only conclude that the UK’s government has no idea how to deliver infrastructure, has never closed an investment deal and really doesn’t understand energy. That’s a shame, as the investing world is also aware that the British economy is saddled with increasingly expensive debt and a growing deficit. The UK is long past the point of borrowing to pay the interest, borrowing is around £120Billion (plus possibly the £20 billion black hole) and debt interest is about £80 billion a year. This is what happens if you keep digging when you’re in a financial hole.

There are only three possible solutions to this problem. Increasing taxation, although that has side effects. Money extracted by the government isn’t available to be spent. Worse, the high earners (not just the non-doms), who pay most of the tax, simply relocate themselves and/or their capital. Raising tax reduces the reward on any investment, meaning that other investments in other jurisdictions may be more attractive.

The second option is to cut spending. That’s tricky for any politician, but especially a party who thrived on the myth of Tory austerity, let alone the party that has become the parliamentary wing of the state machine. IT is the only deliverable answer, in as much as the government holds the purse strings and could balance the budget by simply not making some expenditures. Unfortunately even the simplest thing can be very difficult, as Clausewitz wrote. Removing the deficit would require spending cuts of around £120 billion, that’s 10%. While most businesses could do that and manage the pain it’s harder for politicians to face the inevitable unpopularity. Talking about “tough choices” is one thing, enacting them requires courage – not a notable attribute in modern politicians.

That leaves growth – the elixir of all economics. Few politicians have ever sought to deliver anything else, but most governments encounter recession at some stage. The Chancellor is more constrained than many because the UK’s borrowing is now running at 100% of GDP. So she has little room to flash some cash. Anticipate a highly technical redefinition of what constitutes debt, but the reality is that the UK will be drawing on the bond markets, that is international investors, quite heavily next year. That’s unlikely to deliver the level growth necessary to balance the budget (i.e. to increase the tax take by £120 billion), or anything close to that. Which means that the UK will be needing to raise still more debt next year.

This much has been obvious since Covid; to his credit the then-Chancellor, the now-silent Rishi Sunak, raised concerns about UK debt levels with the then PM, the ever-spendthrift Boris Johnson. Nothing was done then. Plan Truss was badly briefed and quite possibly sabotaged by the media. Some (not me) hoped that Starmer’s Labour would have a cunning plan and, with the appointment of Sue Gray, at least some idea of how government worked so that they would be able to deliver a challenging recovery.

It is now clear that, like all fanatical politicians, they were only interested in power. Having got it they have nothing to say and so are seeking to clog the media with drivel and photo shoots rather than solve the many problems the UK faces. In doing so they exacerbate them – debt problems don’t solve themselves. The consequences of implementing the net-zero delusion will magnify the problems. I suspect that Morgan McSweeny and his crew have conflated government with fighting the next election. He probably already has a media grid stretching out to the next election, some five years away.

He needs to pay attention to the world outside SW1. In their 100 days the Labour government has blown its credibility. They won an election without have having a plan; if they had had one the budget would have been in July so they could focus on delivery. They’ve lost any claim they had on probity through the freebies and nepotism. They’ve lost any semblance of protecting the UK’s national interest with Lammy’s Chagos giveaway and eagerness for paying slavery reparations. They’ve emptied dangerous criminals from jails to imprison a few rioters who were peeved at (still) uncontrolled immigration. They’ve handed pensioner’s cash to train drivers and doctors, without extracting performance targets in return. and they’re letting Ed Miliband destroy the electricity grid in the delusional drive to net zero. The Reeves budget will build on taking money from the deserving to feed a bloated, incompetent state that is failing to deliver while crippling the private sector.

They can do all this because they have an undeserved, massive majority and thus are invulnerable. Within SW1 they are, of course correct. In the real world, when power cuts start and poverty really bites they may not be. Mrs Thatcher’s 100 seat majority didn’t  prevent the poll tax riots of 1990.  Blair’s 179 seat majority didn’t protect him from the Fuel Tanker Driver Strike in 2000. Labour won this election with remarkably low levels of public support, which have since diminished further.

They’re unlike to improve after the Halloween Budget; brace for a Nightmare on Downing Street.

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