LONDON: The UK’s new Labour government has slashed the amount of taxpayer funds it plans to give its new National Wealth Fund (NWF) by a fifth and scrapped a proposed merger between two state investment agencies as its ambitions collide with the country’s tough financial realities.

Chancellor Rachel Reeves is now planning to allocate just £5.8bil of public money to the fund – less than the £7.3bil she previously planned to set aside for the effort.

The decision comes as Reeves prepares to present the UK’s budget on Oct 30.

Reeves and Prime Minister Keir Starmer have warned of “tough decisions” and have already asked departments to find at least £3bil of savings as they seek to fill a £22bil financial hole.

“The decisions which lie ahead of us will not always be easy,” Reeves said in a statement.

“But by making the right choices to grow our economy and drive investment we will create jobs and new opportunities across every part of the country.”

The new NWF is a rebranded version of the UK Infrastructure Bank (UKIB).

Originally, Reeves had hoped to combine the UKIB and the British Business Bank (BBB) into a single entity that offered a broad range of financing, from co-investment to guarantees.

The government had said it would “bring together key institutions” to “mobilise billions more in private investment”.

Bringing them together would have been time-consuming and potentially delayed investment plans, though.

Now, the NWF will focus on climate and the BBB will remain a separate entity financing innovative young companies. Both will have abilities to deploy money from private investors.

In all, the new NWF will have £27.8bil to deploy, according to a statement. The remaining £22bil will come from the UKIB – about £10bil of which is non-cash guarantees.

Reeves said the NWF would have a “bigger team, more freedom and an expanded suite of financial instruments, and more economic risk capital, to ensure that the NWF’s investments can be even more catalytic”.

The fund “will work alongside the UK’s existing structures to better crowd in private investment”, she said.

“We need innovative vehicles that go further and faster, to leverage investment from new sources, like our pension funds.

“We need to unlock long-term patient capital from private investors.”

The £1.5bil that Reeves had previously planned to dedicate to the NWF will now be “reserved to maintain flexibility in how the government can best deliver against its aims for the NWF,” according to the statement.

“All of the £7.3bil will be spent on the five sectors in the manifesto: ports, gigafactories, steel, carbon capture and green hydrogen,” a spokesperson for the Treasury said in a statement.

“We are simply making sure that the funding can best meet the needs of those sectors where the wealth fund’s might not be the best fit,” the statement added.

It’s the latest sign that Labour’s green ambitions have shrunk considerably since the party was in opposition, when it planned to spend £28bil a year on green projects.

Under the new plans, the BBB will be given greater independence to raise money from pension funds for early-stage investment under a new “British growth partnership”.

The BBB, which does not have a balance sheet of its own, has £7.9bil of commercial programmes.

Kate Bingham, managing partner of SV Health and the former chairperson of the UK Vaccine Taskforce during the pandemic, said the overhaul of the BBB “enables the bank to catalyse institutional investment, including from pension funds”. 

 - Bloomberg