One month after the election, the Lab’s Head of Advocacy, Marloes Nicholls, reflects on the new government’s strategy to drive growth and prosperity across the UK.
Since being elected a month ago, the new Labour government has moved quickly to demonstrate its commitment to achieving economic growth. A de facto ban on onshore wind was revoked in the first week as part of a wider set of planning and infrastructure reforms. The King’s Speech saw a record 40 bills, many of which are designed to drive growth. Most recently, the new Chancellor, Rachel Reeves, confirmed plans to hold an Investment Summit to attract international capital.
Industrial strategy makes a come-back?
Reeves has said that her approach to growth is inspired by the recent turn towards ‘modern supply-side economics’. According to the think tank IPPR, this approach “recognises that our economic problems are caused by over-reliance on market mechanisms and argues for greater use of the powers available to the state”. By focussing on ‘industrial strategy’ for the first time in decades, the hope is that the new government will finally be able to undo the UK’s dire economic situation.
The stakes are extremely high. Reeves has said that addressing problems like our crumbling schools won’t be possible until we see growth. And yet questions remain about Labour’s plan. Will ordinary people even feel the benefits of buoyed economic growth? (The Chancellor herself has critiqued previous governments for overly focussing on measures of growth over human wellbeing.) Are Reeves’ ‘fiscal rules’ unnecessarily constraining critical government investment? And if it’s not coming from the state coffers, then where’s the money to spur growth going to come from?
This brings us to the elephant in the room – what is Labour’s strategy to harness the power of the finance sector? Reeves has certainly been looking for ways to raise the large sums of investment the country so desperately needs from private finance. She’s just returned from a trip to New York to meet with Wall Street leaders. A new National Wealth Fund aims to raise over £20bn of private sector funding for the green economy through ‘de-risking’ – measures that make green investments more attractive, due to the state taking on risks. A major Pensions Review aims to unlock some of the billions of pounds held in UK pension schemes to help drive economic growth.
At the same time, the last few weeks have seen Labour push finance regulators to take forward a series of policies – conceived of by the last Conservative government – to increase the ‘international competitiveness’ of the finance sector. These include new listings rules that make it easier for companies to raise money through the UK’s stock markets, but also increase the likelihood that businesses listed here will go bust. Promoting the sector’s competitiveness through regulation is a dangerous business. It means laxer rules and greater profits for the industry, but more risks for society. Labour will remember how, under Tony Blair, a focus on competitiveness over stability contributed to the global financial crisis of 2007/08 – the cataclysmic event that cost the world economy $10 trillion and saw millions lose their savings, homes and jobs.
The challenge of relying on the finance sector to be “the engine of growth” is, to put it bluntly, that finance works for finance – not public policy goals. It’s well documented, for instance, that the UK’s current financial sector under-invests in the real economy, infrastructure, small businesses, and the renewable energy sector – all needed to achieve Labour’s industrial strategy ambitions.
We also know that relying on private finance can come with costly strings attached. The academic Daniela Gabor has raised concerns over ‘Blackrock Britain‘, whereby the government hands control of vital infrastructure (and the right to charge us for it in future) to private finance. Former regulator Mick McAteer has called the extra costs that the public end up paying when the state relies on private funding the ‘private finance penalty‘.
So it’s absolutely critical that Reeves puts in place safeguards to make sure that private finance really does lead to public benefit.
Towards a ‘market-shaping’ approach for finance
The Lab has begun to think about what finance sector policy making could look like for a government committed to industrial strategy and national renewal in the twenty-first century.
To truly transform the finance sector, to improve people’s lives up and down the country, will require changing the purpose of the system and the institutions within it. In our report The Regulatory Compass we outline how reorienting finance sector policy and regulation around social and environmental goals can achieve this. Academics at UCL’s Institute for Innovation and Public Purpose, who also influenced Labour’s “missions“, have developed the concept of “market-shaping” government. Instead of seeing the state’s role as being to correct market failures, it involves “the public sector setting a public purpose for private and public actors to collaborate and innovate to solve societal problems”.
Here are three areas we’re working on in more detail, and where Labour could be more proactive and ambitious in shaping the finance sector to benefit people, the planet and the economy:
- Recommendations to green the financial system to power sustainable growth
- Proposals to reform pensions to deliver decent pensions for all and a sustainable, thriving economy
- A Fair Banking Act to drive capital to small businesses, support an ambitious scaling of the purpose-driven finance sector, tackle financial exclusion, and enable local and national growth.
Ahead of the election, the Labour Party developed a close relationship with The City. Major finance institutions and key individuals provided political support as well as funds and staff. Now that they are in power, Labour must ensure that those close ties don’t mean that the finance sector gets a free rein, but that it leads to effective collaboration which genuinely serves the common good.