Week in Business: Reeves bets on the banks but economy still hurting
It’s a tale of two cities – or two economies, really – as the Chancellor lavished praise on the roaring financial services sector on Tuesday before grimly apologising to the rest of the country on Wednesday when inflation surged higher.
Today’s jobs numbers provide the latest evidence that all is not well out there. So is the gap opening up between the City, and the rest of the country?
It’s no secret that the financial and professional services sector here in the City of London is a powerhouse contributor to the UK economy. And it’s true that jobs in this sector are not confined to the capital – that’s why the Chancellor called her new approach to financial services the Leeds Reforms – a city with thousands employed in finance just as they are in Brighton, Birmingham and Edinburgh.
But they are satellites to a mother ship and the mother ship is London.
Rachel Reeves was right when she said this week that the financial services sector “is critical” for our country – worth nearly 10 per cent of our total economic output and supporting well over a million jobs.
I was at her Mansion House dinner this week, the annual event where the City invites the Chancellor – and the Governor of the Bank of England – to come and set out their stall to the assembled chief execs, investors and industry leaders.
Reeves told us all that she’d “placed financial services at the heart of the government’s growth mission” and talking to bosses in the room they did feel the love, they appreciated the fact that their sector has been formally identified by the government as vital and strategic, singled out for special attention.
Slashing bank regulation
As I’ve said before, most of the pro-Reeves sentiment you can find in the business community is to be found in the City among the big insurance, pension and asset management firms. The banking sector is now also a fan, with the Chancellor boldly cutting the burden of post-2008 rules and regulations.
She’s lowering the capital requirements on banks in a bid to encourage more lending into the economy, she’s shaking up the ring-fencing rules – where investment banking has to be separated from retail banking – she’s changing the authorisation and certification regime for senior managers and scrapping entirely some the regulations that have amassed in the sector since the financial crisis.
Simply put, banks got a lot of what they asked for.
I happen to think this is all quite sensible but it has raised alarm bells among some commentators and some former regulators that Reeves is playing a bit fast and loose with the rules that govern our banking system.
The cry has gone up that this is all “too risky” – too much risk, not enough prudence – and to that I say – well, yes. Risk is back in fashion after a prolonged period where risk aversion became the default.
I commend the Chancellor for whipping the financial regulators into a more risk-on mindset.
New rules that make it easier to get a mortgage, new rules that make it cheaper to raise capital on the stock exchange, new rules that limit the power of de-facto bank regulators, new rules that aim to encourage more of us into riskier stock market investments – I say bring it on.
Risk is good. But let’s be clear; nobody’s talking about recklessness, nobody could look at the Chancellor’s reforms and say they amount to a radical free-market experiment or a free-for-all. It’s about a sensible recalibration of risk. Moving the dial so that, over time, an instinct to regulate could become an instinct to be bold.
Economy still suffering
So the City of London felt the Chancellor’s love this week.
What did the rest of the economy feel? Pain, mostly. Inflation up, unemployment up, business confidence down and taxes set to surge.
Of course financial services are woven into the rest of the economy – it’s not the case that we have the City down here making its own money, doing its own thing, and other unrelated businesses doing their best elsewhere.
All businesses benefit from a robust and dynamic banking sector and the same goes for the insurance sector, investment industry, pensions and asset management. Reeves made that very point this week and she was absolutely right to.
But I’m struck by the words of the CEO of a Canary Wharf based banking giant, who said to me that the only reason he is optimistic about the UK as a whole is because he’s optimistic about the City. Just think about that.
He told me that without the City, the UK would be “a basket case.”
He may have a point. Too many parts of our country are blighted by low productivity, low income, low levels of investment and a decline in living standards that’s set to last to the end of this decade.
Pockets of power including London and other parts of the South East mask a more worrying story about the state of the country. I’m not writing off the rest of the country, of course I’m not, and I’m not suggesting that there aren’t incredible people and businesses all over the country – but when it comes to our overall economy, London does the heavy lifting.
So it’s no surprise that the Chancellor has devoted so much time and energy to supporting financial services, given how much financial services supports the rest of the country. But as we raised our glasses to the Chancellor at Mansion House and as we were invited to toast the health of the UK economy, I couldn’t help but think about how much damage has been inflicted on that economy by this Chancellor.
And it’s a funny old world when that Chancellor can be cheered in the City while heaping so much pain on so many businesses in other parts of our country and other parts of our economy.
