A growth policy hiding in plain sight

In next month's Budget, the Chancellor, John Healey, faces a familiar challenge – the need to deliver growth and get the public finances back onto a more sustainable footing.

One of the biggest opportunities sits in plain sight: getting more domestic capital flowing into British businesses. Britain has one of the world's largest pools of retirement savings, roughly £2 trillion, far beyond the amounts that Government can leverage on its own. Yet only around 4% of UK pension fund capital is invested in UK equities today and that is projected to fall to 2% by 2030.

This predicament has not happened by accident. Government policy over successive administrations has made it progressively less attractive for long-term capital to be invested in UK companies. The UK Government provides close to £60 billion a year in tax relief to encourage people to save for retirement. Yet, at the same time, the incentives to invest those savings in UK companies have been steadily weakened or removed. Costs such as stamp duty on UK equities have also created structural incentives for capital to move elsewhere.

The predictable result is a system that structurally favours overseas investment over domestic opportunity, even when British companies offer compelling long-term prospects. At a time when growth is the Government's stated priority, that disconnect should concern us all.

Of course, pension fund allocations have not shifted solely because of government policy. Regulatory changes, the maturity of defined benefit schemes and the performance of international markets have all played a role. But policy can still influence where future capital is deployed and whether Britain remains an attractive place to invest and list.

This matters because the absence of a strong domestic investor base has real consequences. When UK companies cannot access sufficient long-term domestic capital, they are more likely to be acquired, move overseas or choose to grow elsewhere. That means fewer headquarters, fewer jobs, less innovation and lower future tax revenues in the UK. Other countries, such as Australia and Japan, do this much better, maintaining significant domestic pension investment while still delivering strong returns.

Greater domestic investment is not a substitute for broader economic reform on planning, skills, infrastructure and energy. But it is one area where government can act relatively quickly and at scale. The combination of fiscal constraint, heightened geopolitical uncertainty, and rising pressure on public finances requires government to look beyond traditional spending measures and focus on mobilising tens of billions of pounds of long-term private capital.

A clear solution exists, based around improving incentives for UK capital to invest in UK assets. In its recent paper, Backing British Growth, The Capital Markets Industry Taskforce (CMIT) proposed a targeted package to reduce the transaction costs that make UK equities less attractive, reward long-term investment in UK-listed companies within the pension tax system, and create modern incentives for pension funds to allocate more capital to British businesses.

Firstly, reduce friction by removing stamp duty for UK pension funds and ISAs when they are invested in UK shares. Secondly, introduce a modern, capped fiscal incentive for UK pension funds that invest in UK-listed companies. And thirdly, the Government should recognise those who provide material long-term UK investment through their pensions by either removing or lowering the tax on their pension pots.

To be clear, the solution is not to mandate investment decisions but to improve the incentives to invest domestically – and the benefits are considerable. A stronger domestic investor base would help British companies raise capital and remain headquartered in the UK. It would support sectors that depend on long-term capital, including technology, life sciences, defence, energy, financial services and advanced manufacturing. It would also allow more British savers to share in the success of the companies driving future growth.

Most importantly, it offers a practical route to generating growth and easing the intense fiscal pressure. When difficult fiscal choices dominate political debate, unlocking private capital offers one of the most effective ways to support growth without placing further strain on the public finances. It is an opportunity for this Government to show it is prepared to act decisively where the opportunity allows.

The proposition is simple: the UK should do more to connect long-term savings with productive investment in its own economy. The companies, capital and opportunity are already here. What is needed now is the political will to bring them together, ensuring businesses can access the funding they need to grow, while savers share in the returns that growth can create.