Week in Business: Why Britain needs reform
Take a look at our country’s long-term challenges – and take a look at the more immediate difficulties from growth to energy – and it’s clear Britain needs reform. But do I mean Nigel Farage, or something more fundamental?
But I’m not talking about Reform UK or Nigel Farage – though the insurgent’s rise in popularity isn’t hard to explain and it’s certainly related to the wider arguments I’m about to make.
I’ve often written and talked about the need for some radical thinking when it comes to our economy but I’m a mere amateur – a hobbyist – when compared with one of the biggest brains in the country – I refer to former Bank of England chief economist Andy Haldane.
Haldane was one of the most senior figures at the Bank of England for decades, serving as chief economist from 2014 to 2021 and on Tuesday night earlier this week he addressed the Morning Wire Awards at London’s Guildhall with that speech has got people talking.
After the Awards – which were an absolute blast, by the way – I got a lot of emails from guests saying how much they enjoyed it or how good the food was – and it was, thank you Clink charity – but most of all I got people asking me either for a copy of Haldane’s speech or to be introduced to him.
Nobody asked for a copy of my speech by the way but I’ll let that slide.
Some of the most senior people in the City – and politics – contacted me about Haldane’s remarks and I know for a fact that his observations delivered on that night are now being discussed at the highest levels in banks and government departments.
So, what did he say? Well, I’ll give you a flavour.
He basically summed up the British condition of the past 20 years as one of “risk and risk-aversion”.
Shocks, or nasties as he called them, including the financial crisis and Euro crisis, Brexit, Covid, war and Trump’s tariffs, have left individuals, governments and investors hunkering down to avoid risk.
He described this as a perfectly natural inclination, but warned that the mindset has caused terrible damage, ranging from depressed business investment over decades to the erosion of UK equities on the balance sheets of UK pension funds.
Strikingly, he drew a parallel with the time of the Great Depression and what economist John Maynard Keynes called “the paradox of thrift” – where, in Haldane’s words, “too much of a good thing, thrift, becomes a bad thing, depression.”
The question Haldane posed to the room was how we could go about breaking “the cycle of doom and gloom” and the toxic relationship between uncertainty, risk aversion and low growth – a relationship that has baked in “no or low returns, no or low investment, low or no growth.”
Different people will have different answers to this question, often depending on their political priorities. For Haldane, part of the answer is to be found in revitalising a risk appetite across regulators, investors and government.
Speaking as someone who used to be one of the nation’s top financial regulators, Haldane called for a radical slimming of regulations and regulators – he advocated cutting the number of regulators in HALF – something he said could be easily achieved without much difficulty.
Now, as I’ve talked about many times on this show, the Prime Minister, Keir Starmer, claims to have regulation in his crosshairs, and he’s blamed “a morass of regulation” for preventing “billions of pounds more of investment from flowing into Britain” – and he has vowed to “sweep away” red tape.
However, while Haldane described the government’s approach to deregulation as “directionally right” he cautioned that “words are cheap” and called for more robust efforts to encourage risk, saying that seeking regulatory reform “via exhortation and press release” has “little chance of success.”
He says parliament needs to rewrite the very foundations of regulatory law to make it clear exactly what we want our watchdogs to do.
He also called for a more robust industrial strategy; something the government plans to unveil shortly.
Stimulating stuff, I’m sure you’ll agree and no wonder it’s got the City talking – but there’s more to this story.
Andy was absolutely right that the pendulum has swung too far – that we are risk averse – but that condition applies beyond financial regulation and business activity – it has infected our politics, too, and the truth is we need a much more ambitious conversation in this country about the size of the state, its functions, our tax burden – what we expect from government and what we’re prepared to pay for.
Let’s look at the context: In 2010, government spending as a proportion of GDP was 46 per cent, having climbed steadily from a low of 35 per cent in 1997.
What became known as austerity under David Cameron saw a gradual decline of state expenditure – falling from 46 per cent to about 39 per cent of GDP by the end of 2020.
Covid hits – and the government spends hundreds of billions of pounds in its response, taking state expenditure to a peak of 53 per cent of our entire national output.
When the pandemic receded, public spending fell, of course, but not back to its pre pandemic level, not even close. By 2023 it had settled back to around 45 per cent.
We now know, post Spring Statement, that public spending as a percentage of GDP will still be higher in the years ahead than at any time since 2010 and that public sector net borrowing will still be £8bn higher, on average, over the next five years than was forecast last Autumn. Public sector net debt will also come in around £30bn higher by 2030 than was predicted at the time of the last Budget, due to additional borrowing.
That’s the immediate headache for Rachel Reeves, who is almost certainly going to blow up her fiscal rules by the time of the next Budget in October.
That’s a mess partly of the government’s own making but also it stems from the 20 year approach to our economy that Andy Haldane was talking about.
The only person who tried in recent years to have this fight was Liz Truss – and, on paper, she wasn’t far wrong – but she blew it – totally, partly because she was muddled – trying to spend billions on paying everyone’s energy bills at the same time – but also she got the politics dead wrong.
There was no democratic consent for her agenda, and reform of this nature – or indeed reform of the opposite nature – the left-wing response, if you like, – needs democratic consent.
So, who in British politics will attempt to have this conversation? It could be Reform, it could be Kemi Badenoch’s Tory party – but this is a conversation we can either choose to have now or we can have it when demographics and economic reality forces it upon us.
Andy Haldane started this conversation, or at least part of it, at our Awards on Tuesday night, and its time others joined in.