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The City has always been a vital part of the UK economy, and both the Conservative and Labour parties have shown a surprising interest in further deregulation to ensure its continued growth. However, this approach comes with risks and costs that affect the rest of society.
As someone who has campaigned on finance for almost 30 years, I find it unprecedented that both major political parties are aggressively promoting the interests of the financial sector. While a successful financial sector is necessary, unchecked deregulation and financialisation have proven to be dangerous and costly.
History serves as a lesson for the Labour party. The permissive approach to regulation adopted by New Labour prior to the 2008 financial crisis resulted in an oversized finance sector, leaving the UK highly vulnerable when the credit crunch hit. The consequences of that crisis are still being felt today.
While mainstream banks have become more resilient, the risks have shifted to the shadow banking system. Despite Brexit, the City remains a major global financial center, and pursuing deregulation could have consequences for the international financial system. Labour must recognize the dangers of engaging in a regulatory race to the bottom.
Deregulation and financialisation not only increase the risk of acute crises but also lead to everyday environmental, economic, and social harms. The City now claims to play a key role in preventing climate catastrophe, but it still profits from financing activities that contribute to climate harm. Labour should commit to empowering financial regulators to protect the environment from the negative impacts of finance.
Financial market activities have inflated property prices, making it difficult for younger generations to own homes and leaving many with massive mortgage debts. They have also driven up private sector rents and contributed to regional and household inequality. The finance sector’s huge earnings and bonuses far surpass those of ordinary workers, and those with existing wealth benefit the most from rising asset values. Little progress has been made in promoting financial inclusion since 2008, and millions of households have little to no savings, making them highly vulnerable to financial shocks.
Banks focus on speculative activities, depriving real economy firms of crucial financing. The short-term mindset of the City continues to hinder the ability of these firms to plan for the future. Company boards prioritize boosting share prices to appease investors and earn bonuses, often at the expense of long-term research and development and investments in human capital.
Despite all the evidence, Labour is pushing for an even larger role for finance in our lives. However, relying on private finance to fund public policy goals is costly. The state can raise taxes or borrow at lower rates, even when government borrowing costs increase. Lenders and investors expect high returns from financing projects, and those returns have to be paid for somehow. For example, Labour’s green plan relies on £28bn of annual investment, with matched funding from private finance. Using more expensive private finance would increase the overall cost of the green transition, leading to higher bills for households.
Moreover, Labour’s proposal to “de-risk” investments for private finance by allowing pension funds and insurers to invest alongside the British Business Bank would potentially result in the state guaranteeing losses while financial institutions reap the rewards. It’s a situation where the City wins regardless of the outcome, while the rest of us lose.
So, why is deregulation and financialisation such a core aspect of Labour’s economic policy, despite its nonsensical nature? One reason might be the party’s obsession with appearing fiscally prudent. By limiting public spending and using City finance to fund policy goals, they can keep costs off the state’s balance sheet. However, this is a false economy that transfers higher costs to households.
Hopefully, Labour will recognize the need to prioritize the environment, the real economy, and society when shaping policies related to the City. There is still an opportunity to develop a more progressive agenda for finance.
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