It is now a decade since the first tremors of the global financial crisis began to be felt. In the immediate years that followed, the Labour government led by Gordon Brown intervened to stop the crash and the inevitable recession that followed developing into a more serious global depression. By the time Labour left office in May 2010, the economy was growing once again.
Since that time, it has fallen to the Tories and their erstwhile partners in coalition, the Lib Dems, to reform the British economy and put it on a secure footing for the long-term.
What did they promise?
Shortly after becoming Chancellor, George Osborne talked of the need for a geographical and sectoral rebalancing of the economy, citing Britain’s over-reliance on services—particularly finance—in London and the south east. He asked us to imagine ‘a Britain held aloft by the march of the makers’.
But this rebalancing has not taken place.
The IPPR’s Commission on Economic Justice reports that median incomes in the North West, South West and West Midlands are now more than 30 per cent lower than in London and the South East, and 35 per cent lower in Wales. A recent pamphlet by the National Institute for Economic and Social Research shows that productivity (GVA per head) in London is more than twice that of the Yorkshire and Humber region, in which my constituency of Sheffield Heeley is situated. More generally, the IPPR tells us that productivity in the UK is 13 per cent below average for the richest G7 nations, while the IMF ranks the UK 156th out of 173 nations for business investment as a proportion of GDP. Just 1.7 per cent of our GDP is invested in R&D, compared to 2.9 per cent in Germany and 3.5 per cent in Japan. As for the ‘march of the makers’, the latest ONS release shows the UK’s trade deficit in goods increasing by £1.1 billion to £34.4 billion.
The Tories simply do not have the ideas or the will to create the kind of dynamic, well-balanced, innovating and socially just economy we so desperately need in Britain. They are intellectually moribund, unable to move on from the economic model that failed whole sectors and regions that time they were in power. Only Labour has the bold vision for a new industrial strategy which will see the state working collaboratively with business to create the prosperity and high quality jobs of the future.
A crucial element of this industrial strategy will be reforming our banking and finance system so that productive businesses get the long-term investment they need to prosper.
We scarcely need reminding of the short-comings of our current financial system. In 2009, then Chairman of the FSA, Adair Turner, chided Britain’s banks for engaging in too many ‘socially useless’ activities. Since then, the situation has hardly improved. Loans to businesses account for less than 5 per cent of UK bank assets, with much more lending going into land and property, driving up asset prices. Financial markets have become damagingly short-termist, preferring a quick-buck to the slow-and-steady returns from long-term investment in productive industry. Our SMEs, the backbone of our economy, have suffered since the collapse of the wholesale credit market in 2008. Four big banking firms control 80 per cent of lending to SMEs, who cannot always access the credit they need to expand their operations. A recent study by BIS states that, ‘The UK currently has lower direct public involvement in the SME lending market than the other countries considered in this study.’
As one component of a new industrial strategy, our manifesto made the case for a National Investment Bank (NIB). The UK government has skirted around this idea in recent years with the formation of the Green Investment Bank and British Business Bank, but these have severe inbuilt limitations and have failed to make a major impact on the economy. A radical Labour policy could take the form of a national network of regionally or locally based banks, modelled on the German Sparkassen, as described in recent research by Demos. Their core remit would be set by national government, with the aim of promoting SMEs in their local area, over long timescales, seeking slow-and-steady returns which the capital markets overlook. While the state would play an important role in setting the overall agenda, branches of the NIB would be free from day-to-day interference, run by expert management boards with the aim of turning a profit. The crucial difference is that such institutions would be profit-making not profit-maximizing, with a duty to make investment decisions according to criteria other than just profitability, being overseen by supervisory boards composed of local stakeholders such as businesses leaders, workers and councillors. These banks would operate according to what Duncan O’Leary of Demos refers to as a ‘dual bottom line’—seeking both to promote the local economy and turn a profit.
Of course, a National Investment Bank is not a panacea for all our economic woes. As well as creating dynamic new institutions, we must look to reforming existing ones. Notably, we must take on board the findings of the recent Kerslake Review, which criticised the Treasury’s short-termism (being driven by the annual budget cycle), over-centralisation and favouring of the financial services sector. The Review recommended, inter alia, that a new unit be established within the Treasury to oversee greater fiscal devolution, and that BEIS be given genuine free reign from the Treasury to develop a long term industrial strategy for the UK.
It is a national scandal that our financial system has not undergone root-and-branch reform since the debacle of 2008-09, when government had to step in to rescue the banks from the consequences of their own incompetence. Since that time, it has been ordinary people across Britain who have paid the heaviest price for the bankers’ failures, in the form of public spending cuts and tougher borrowing conditions. Only a radical Labour government has the determination to deliver what we really need, and deserve—a banking system that supports productive, socially useful enterprise. A banking system that works for the many, not the few.
 https://ippr.org/research/publications/cej-time-for-change; https://www.demos.co.uk/project/community-chest/