Rebalancing the UK Economy

Neil Carmichael Excerpts

Wednesday 3rd November 2010 Westminster Hall

[Mr Mark Field (Cities of London and Westminster) (Con)]

Amid the feverish analysis of the size, scope and impact of the Government’s chosen spending cuts, a fresh debate is emerging about a desirable blueprint for Britain’s economic future. Such is the near-universal distaste reserved for financial services, that a determination no longer to rely on their economic contribution seems one of the few certainties in the debate. As a result, rebalancing is the new economic watchword. For sure, the financial crisis has painfully highlighted the UK’s dependence on the City and our collective exposure to the risks taken by the global banking fraternity. My worry, however, is that the phrase is being used—even, I fear, by some Conservative coalition Ministers—for playing to the gallery as part of the general banker-bashing sentiment.

It is superficially convincing to promote attempts to stimulate growth more evenly through the regions, and stepping up our game in the innovation and incubation of companies in the high value-added areas of high- tech manufacturing, engineering, pharmaceuticals and biotechnology. I acknowledge my own part in that: I have played a role in ensuring the incubation of those small companies in the City of London. The Corporation of London is to be complimented for finding premises in double-quick time for such companies.

I wholly support the initiatives of the Government, in particular funding the £200 million science park in St Pancras. That is both welcome and highly commendable. However, we should be wary of how the aim of rebalancing is pursued. Unwisely, most of the focus so far has been on how we might shrink the City to reduce its relative importance, rather than providing a positive economic climate in which all other sectors can flourish.

Before we pursue what I believe would be such a dangerous policy any further, I wish to make the case why financial services must remain a central plank in Britain’s bid for continuing relevance in a fast-changing global economy. A strong financial services sector is overwhelmingly beneficial to our nation. It will provide the critical mass to draw business to this country. It offers diversified sources of capital to small business. It makes huge contributions to the Treasury’s coffers, in terms of tax and employment, and it supports a wide range of complementary industries, from law to leisure. It is also one of the very few areas where we might envisage significant growth in the decades to come.

The tens of millions of people who join the ranks of the global middle class annually from India and China have a greater cultural propensity to save, and they will seek expertise in investing their savings for the future. It seems evident to me that the entire drive for the west is directed towards capturing the growth of the developing markets. It is an argument that has been put to me in recent weeks by German industrialists. Here in the UK, we have already secured such an important competitive advantage. It is in the financial services sphere. Why throw that advantage away? Aside from that, there are several reasons for us to believe that the task of rebalancing might well prove trickier than we may wish.

It is time that we changed our attitude towards the City, from one of punishment, which has taken place in the past two or three years in the aftermath of the financial crisis, to hard-headed realism. How we treat our nation’s most valuable economic resource in the years ahead will be a litmus test for international business in determining how serious Britain is in its wish to be dynamic and have an open economy that embraces global talent, promotes aspiration and welcomes business.

I hope that the Minister will consider this: the UK should perhaps, for example, look at the way that the Isle of Man has quite successfully rebalanced its economy through promoting new growth areas but, crucially, in a way that has not undermined or diminished the importance of its own very important financial services sector. The Isle of Man has embarked upon a diversification drive that has built a thriving hub for high-tech manufacturing, including aerospace, which of course has strong links to the north-west of England economy. It has created a propitious environment for world-class e-gaming companies; it has established world-class high-quality aircraft and ship registers and created a diverse and thriving space commerce sector, with many of the world’s leading operators established on the island. Crucially, it has also continued to support—very vocally—and promote its successful financial sector, which is wholly compatible with, and supports, other sectors of its diversified economy. In essence, the Isle of Man Government have not picked winners at the expense of penalising other sectors, but have shown that they can build a balanced and diversified economy, while maintaining a strong and thriving financial services sector.

While the banking crisis was in full swing in 2008, it seemed that almost overnight the financial sector had become a useful scapegoat for all our economic ills. Many of the criticisms levelled at the banking fraternity have been legitimate, in part at least. The failure in that sector of the economy exposed the domestic taxpayer to such mind-boggling sums that it was, in many ways, scandalous, and seemed to confirm suspicions that the wealth created by the City was simply a mirage. Irresponsible risks were taken. Debt instruments certainly became too complex. Money was lent to those who could ill afford the repayments. Incidentally, I fear that one of the difficulties is when policy makers seek out so-called socially useful banking—the genesis of the sub-prime problem that occurred initially in the US and in the UK subsequently from the mid-1990s. Regulators—if not regulations—proved ill equipped at times for their job.

The City’s dominance in the domestic economy in the past two decades had some wide-ranging social consequences. For a large proportion of British people working outside the gilded corridors of the financial services industry, the growth of the City’s power increased the cost of living and reduced, at times, to just a wistful dream any prospect they may have had of getting on the housing ladder, except via colossal personal debt. It could also be argued that the City precipitated a brain drain from other professions and industries, with so many of our brightest and best graduates over the past quarter of a century tempted away by unrivalled starting salaries in the banking sphere.

In some senses, the City’s success has merely masked—until its failure uncovered—some more fundamental problems that had developed in the western economies. Governments had been spending far too much money. As individuals, we had also racked up far too much debt. We found it cheaper and easier to buy cheap goods from abroad, import migrant workers and pay off our own citizens with welfare, rather than confront the difficulties of either finding sufficient employment for blue-collar workers who were losing ground to eastern competition, or tackling the dearth of skills among the indigenous population. I am glad to say that with some of our welfare policies, the Government are definitely going down the right route to try to counter some of those issues.

Neil Carmichael (Stroud) (Con): I do not think that it is inconsistent to have a thriving financial sector and other thriving sectors, including small and medium-sized businesses. Thriving businesses will deal with the problems to which you just alluded, in terms of migration, skills training and so on. A financial sector would welcome further opportunities to invest in its own territory and internationally. The two things go hand in hand.

[Mr Field]

I would not disagree with my hon. Friend in any way. It is the rhetoric, I think, of some policy makers, both in the present, but particularly in the past, that could have applied something of a barrier to that very ideal goal.

Rather than openly confronting some of those issues post-crisis, the implicit and perhaps all too easy assumption has been that, had the banking sector not collapsed through the profligacy and greed of some its employees and key players, we might have continued as we had before. There is also an assumption that to solve our current problems we need simply to return to what used to be the strength of a couple of generations ago—rebalancing the economy towards making things. The intensity of the rhetoric that has built up around the role of banks in the economy is such that politicians and even bankers themselves have often been unwilling to stand up for the sector.

Alas, that rhetoric has not subsided as time has passed. In fact, it is likely to intensify in the months ahead as the cuts bite and questions are asked about how and why Government money can be found to prop up the banks and pay out what I suspect will be another bumper round of bonuses this year while public sector jobs and services, as well as benefits, face the axe.

In response, Governments approach the financial services sector as something to be outwardly chastened, while they privately recognise its importance to the wider economy and rely on the continued income and jobs that it provides. In public, banks are told to lend to inherently risky start-ups—small businesses and first-time buyers. They are berated for trying to take the collateral that small business owners will often have tied up in their own property. At the same time, however, banks are told—indeed, they are required—to meet stringent new capital requirements. The new £2 billion bank levy is announced with a fanfare and the 50% income tax rate remains in place, yet the Treasury quietly acknowledges that it cannot put further pressure on balance sheets while storms are still gathering in the eurozone, which I think will be one of the big stories in the months ahead.

--- Later in debate ---

[Mr Field]

It is a credit to you, Mr Betts; it must be the informality of these arrangements that have allowed my colleagues to drop their guard somewhat.

I think that there is a lot in what my hon. Friend just said. As he rightly pointed out, in many ways a huge amount of money has been pumped into the financial services sector, yet there seems to be very little idea of what the global landscape of banking and finance will look like in the future.

The Government have a part to play in the process. We are, after all, majority stakeholders in two of the big four banks—the Lloyds Banking Group and the Royal Bank of Scotland—and we need to utilise that muscle to try to make a case for how the banking world should look in the future.

To some extent, there has been a somewhat confused strategy that has been of no benefit to the Government, the banks or the public. In essence, the risk is that we are now penalising our single most competitive economic sector, while somehow fooling ourselves that a miraculous rebalancing of the economy can occur by default. In truth, the rebalancing will only be threatened by diminution of the financial services sector. Let us not forget why, on the whole, a thriving City makes for a successful Britain.

Since time immemorial, the City of London has enjoyed an international reputation as a bastion of commercial certainty and reliability. It has promoted financial innovation, it has provided an international market for global merchants and in commercial affairs it has rightly been seen as a watchword for justice, neutrality and fairness. Of course, it also has a number of innate advantages that ensure that companies’ loyalty to London runs deeper than just appreciation of its tax regime. Those advantages include, of course, a time zone that lies between those of north America and Asia, which makes the City an excellent base for international company headquarters, and the lifestyle assets of a culture, an excellent educational offering and a population so diverse that all can feel at home.

As a result, London has emerged as the global financial centre. Indeed, so successful has the British financial services sector been that it now contributes more than 10% of Britain’s economic output. We should also remember that although the sector is focused in central London, a significant amount of its activity takes place in a range of regional centres in the UK.

Of course, it is not only banks that benefit from our financial sector but complementary industries such as law, insurance, retail and entertainment, as my hon. Friend the Member for Newton Abbot (Anne Marie Morris) pointed out. Our top-flight universities, the arts and the charitable sector also gain, the latter two from cultural funds or corporate responsibility grants that are, of course, often provided by the City’s top banks and bankers. The presence of our large financial sector gives London the critical mass to attract the best professionals from across the globe.

Banking bail-outs notwithstanding, the financial services sector contributes massively to the Treasury’s coffers in tax revenues, with an estimated contribution of £61 billion in 2008-09. Of course, it also contributes massively in terms of employment, with more than 1 million people employed directly in financial services across the UK.

The financial services sector also plays a critical role in supporting business, not only in attracting huge inward flows of foreign capital to help to fund our infrastructure but in propping up our companies and providing British companies with access to a diversified source of capital, to enable them to invest and expand.

Even if opposition to City dominance is practical rather than simply ideological, I suspect that it is unlikely any time soon that any other economic sector will be a world-beater in the way that the financial services sector is. I am afraid that the industries in which we are hoping to diversify are ones where competition will be very stiff. For example, the Chinese are as keen to develop their manufacturing capacity when it comes to green technology as we are.

Moreover, we should not assume that people in developing countries will start to spend their savings as the western world weans itself off debt and consumption. Britain is just one of the nations that have been pinning some of their hopes on export-led growth. However, despite a 20% depreciation in the value of the pound, the UK’s trade deficit has continued to widen. Meanwhile, with uncertainty infecting the financial system, British corporations have shown little appetite for expansion any time soon, as they accumulate cash cushions instead of investing.

[Neil Carmichael]

Will my hon. Friend give way?

[Mr Field]

My hon. Friend will have to forgive me for not giving way; I want to say a few more things and I obviously want to hear what the Minister has to say in response.

I am not convinced that London’s population is sufficiently equipped to deal with significant growth in new industries. Few people outside the capital may realise that, at 9%, London has one of the highest levels of regional unemployment in the UK. With Britain wedded to a model of high welfare and unemployment benefits, those living in the capital need to earn considerably more than the minimum wage to make it worth their while to work. As a corollary, it has of course been far easier in recent years to encourage hard-working migrants to fill the jobs that Londoners have been unwilling or unable to take up themselves. In the capital, a large proportion of the indigenous working-age population are without the skills or inclination to fill jobs of any kind.

Put simply, our financial services sector is a huge asset. With vast numbers of employees in the developing world entering the middle classes each year and earnestly looking for ways to save and invest, it is also one of the few sectors in which we can confidently predict significant growth in the years ahead. A nation of only 60 million people should be grateful to have one absolute world-beating industry that is, in normal times, incredibly lucrative and that feeds a wide range of other sectors.

By all means, we should focus on trying to help build up other sectors if we can, and on reducing the exposure of taxpayers to risk. However, economic diversification will not be an easy option and it should not lead to the neglect or diminution of the City. Indeed, if it leads to that, the task of diversification will become even harder. Global businesses and their highly skilled work forces do not necessarily have any innate loyalty to the UK. They will go where the legal, fiscal, regulatory, physical and social environment works best for them. I fear that the continued rhetoric of hostility towards banks and regulatory uncertainty only serve to deter such businesses. Why stay and put up with ever more grief?

In that respect, more pressing than diversification is the need to make the UK a place of possibilities, enterprise and entrepreneurship. It is not for this or any Government to pick winners and losers, or indeed to prop up losers and penalise winners. The continuing attacks on our financial services sector no longer serve any purpose. I understand the need, just before the election, to play a bit to the gallery—one had to recognise public sentiment—but we are now four and a half years from the next general election. I hope that the Government will have the confidence to make the case for our financial services industry. As long as we get the regulation right, we should not be fearful of confidently articulating the terrific benefits of a robust and expanding financial sector. Let us draw a line under this period of uncertainty and hostility while we still have that fantastic springboard to ensuring the UK’s great relevance in a fast-changing global economy.