“Productivity isn't everything, but, in the long run, it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”
Paul Krugman, 2008 recipient of the Nobel Memorial Prize in Economic Sciences
Apparently, the Chancellor’s nickname in the deep bowels of HM Treasury is “Box Office”, which has an Armando Iannucci sense of proportion given the mainstream media’s more prosaic “Spreadsheet Phil” moniker. Yet dark humour is a valued commodity for Treasury mandarins just days ahead of perhaps the most sensitive budget of recent times.
What do we expect from this budget?
There are certainly things we know that we know (shades of the other Donald) and it is these that will get all of the headlines in the press. We know that there is going to be a significant initiative on getting millennials onto the housing ladder. We know that public sector workers – nurses at least – will get an increase in pay. We also know there will be something in this budget for university students, even if it will disappoint most of them.
However, there is something else that will be a hallmark of this week’s budget, even if it gets scant attention in the general press, and that is the treatment of venture capital in what is officially known as the Patient Capital Review. More importantly, it will be a hugely significant initiative which will seek to address the productivity problem that has afflicted the UK since the collapse of Lehman Brothers in 2008. UK productivity had grown by 2% per year in the post WWII years, but stagnated to a growth rate that is fully 90% below that growth trajectory since 2008. Perhaps more strikingly, UK productivity is 30% below the US and 35% below German productivity in 2017.
This has not gone unnoticed by the Chancellor and HM Treasury at large, and is perhaps the most vexing structural issue for them in the medium term. Solve this problem and most of the other issues of the day – financing the NHS, increasing public sector pay, balancing the budget – become much more achievable. Some of the factors needed to increase productivity – investment into education and infrastructure, interest rate increases, etc. – will surely feature in this week’s budget but there seems to be a special place in Mr. Hammond’s heart for incentives towards technology investments.
Some will say that the UK has never had a problem with innovation, punching well above its weight in terms of inventions and university research. However –
and this is only slightly facetious – it is also the country that invented both the computer and the world wide web and didn’t commercialise either of them. Perhaps for this reason, investing in and commercialising cutting-edge technology is valued by the government for their success in creating dynamic companies. In the August 2017 consultation paper by HM Treasury concerning the Patient Capital Review, the importance of promoting early-stage growth companies was discussed:
“By not realising the economic benefits derived from its strengths in creating start-ups with world-leading ideas, the UK therefore appears to be failing to maximise its potential productivity gains.”
Reading HM Treasury’s August consultation paper, “Financing growth in innovative firms”, one doesn't get a sense of a government doubting its resolve to foster an environment to harness the UK’s undoubted ability to innovate or create employment. Nor did this appear evident when the Chancellor was interviewed on The Andrew Marr Show yesterday morning:
AM: “One of the big themes… is our technological development. AI, robotics, there has been a suggestion that you are going to have a big drive towards driverless cars… (by the next election) will you turn around and actually see a driverless car pass you?“
PH: “Well that is our objective; to see fully driverless cars… in the UK by 2021… we have to embrace these technologies, we have to take up these challenges if we want to see Britain leading the next industrial revolution. We have a huge advantage across a whole range of new technologies that are going to transform our lives. And if we want to ensure our prosperity in the post-Brexit world, we have got to embrace these new technologies… that will create the high paying jobs of tomorrow.“
As an aside, driverless cars are close to Symvan’s heart, as I mentioned in a previous blog. One of our advisers and a member of our Investment Committee is one of the major actors involved in bringing this remarkable revolution to the world.
What was illuminating to me about Andrew Marr's interview yesterday was that the Chancellor was implicitly highlighting just how important the Patient Capital Review will be to the government going forth, and yet there has been very little media attention focussed on this to date. Symvan expects a major emphasis in the budget to focus on maintaining, if not increasing, government incentives for innovation. We expect the British Business Bank to be a major recipient of further government largess, but we also believe that technology and other growth companies will come out unscathed in the EIS/VCT world.
Unfortunately this will not be without cost for many EIS and VCT providers, particularly those who are not operating within the “spirit” of HM Treasury's investment criteria. HM Treasury has been heavily hinting for over a year that they will be ‘cracking down’ on a large segment of the market, particularly the subset knows as ‘capital preservation’ investments which the Treasury defines as follows:
“This typically involves investment in lower risk, often asset-based companies that generate stable returns without aiming for significant growth. Even with no growth in capital and low dividend payments, an investor will see a healthy return.”
For anyone trying to manipulate the ‘spirit of EIS’ by disguising or seeking to eliminate what most would see as venture capital equity risk, HM Treasury will be presenting a message for you on Wednesday – goodbye and goodnight.
There is no doubt in my mind that this is the correct message to be sent out for two major public policy reasons.
The first is that the primary aim of the Patient Capital Review continues to be solving the productivity problem in the UK. Growth companies typically finance the early years with EIS & VCT investments, and the ‘capital preservation’ vehicles ultimately deny financing to those firms more closely aligned with HM Treasury's objectives.
The second is that it has more to do with the ethics of investing by HNWs. Venture capital investing cannot possibly justify receiving government funds ahead of other worthy requirements – dealing with medical services, homelessness, or national security – simply to allow for tax breaks for Britain’s most financially privileged populace, unless they are taking personal risk to help to fund the businesses of the future that will help boost Britain’s productivity puzzle.
Do not expect the Patient Capital Review to dominate the headlines on Wednesday, but expect the coverage to change ever so slightly by Thursday and thereon. Patience.