The UK economy has experienced an almost unprecedented decade of stagnation since the 2008 financial crisis. The average worker earns the same today as she did ten years ago. Productivity, the long-term driver of growth, has remained flat over the past decade. The UK’s current account deficit – the difference between what we buy from the rest of the world and what we sell to it – is a remarkable 4.4 per cent of GDP, while business investment has fallen for the last four quarters.
Our vast financial sector should be part of the solution to these woes, but instead it’s part of the problem. Since the 1980s, when capital controls were removed, banks deregulated and stock markets unleashed, the UK’s finance sector has trebled in size, significantly outpacing growth in the rest of the economy. By 2007, the assets of the UK’s banking sector were five times the size of British GDP.
For a period, the financialisation of the British economy was regarded as an unambiguous success story. The UK was modernising by exploiting its comparative advantage in financial services, spelling the end of the retrograde, socialist obsession with industry that marked the postwar era. The City of London became the centre of global finance, overtaking Wall Street in some areas such as currency trading, while exploiting its network of tax havens to become the money-laundering capital of the world.
But in 2007, the party came to an abrupt end. The growth of the finance sector had been nothing more than a mirage based on “socially useless” speculation and irresponsible lending. The UK’s finance sector hadn’t been exporting a service; it had been acting as a broker, selling our assets in order to facilitate exorbitant amounts of borrowing from the rest of the world.
This unsustainable economic model has created a set of deep-seated structural problems in the British economy that persist to this day. The 1980s led to the cult of “shareholder value”, which prioritises short-term profits over fair wages and productive investment.
Meanwhile, the rise of universal banking has created an oligopoly of international banks that provide expensive, poor-quality services to the UK’s businesses and consumers. These banks have made billions from unproductive real estate lending, which simply finances the transfer of assets from one place to another, rather than expanding the productive potential of the economy.
The UK has one of the largest finance sectors in the world, yet it also suffers from low levels of investment, regional imbalances and excessive debt levels. It is high time that finance was made to work for the real economy, rather than the other way around.
Labour is seeking to achieve just this. In a report published on 1 April, the party outlined its plans to develop a public banking system that would support responsible lending, boost business investment, and help the transition to a green economy. A publicly owned Post Bank of up to 3,600 branches, based on the Post Office network, would be established to serve businesses and consumers, while RBS (currently 62 per cent publicly-owned) would have a similar mandate. The plan expands on Labour’s previous proposal of a National Investment Bank (NIB) to support a “green industrial revolution” – the British version of the US Democrats’ Green New Deal.
These proposals are radical, and would go some way towards de-financialising the UK economy. But such policies are also comparatively mainstream in many parts of the developed world. In view of the challenges facing the UK, Labour needs to show far greater ambition.
The NIB would not, in its current form, be large or strategic enough to reverse four decades of underinvestment, especially in the capital-starved regions. Establishing the Post Bank and keeping RBS in public ownership would help push standards up and prices down in retail banking. But these institutions would not pose a direct threat to the oligopoly of existing lenders. RBS should be fully nationalised, with its investment banking arm sold off or incorporated into the NIB. These institutions should then be used to lend directly to strategic sectors of the economy, as well as allowing consumers to refinance unpayable debts on easy terms.
Labour’s proposals are a welcome break with financial orthodoxy. But if the party wants to transform the UK’s low-wage, low-investment, high-debt model, it must go much further.
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This article appears in the 03 Apr 2019 issue of the New Statesman, The Brexit wreckers