Mansion House speech. Last week, Nadhim Zahawi stressed the “critical role of financial services” in his first Mansion House speech as Chancellor. Along with controlling inflation and creating “the conditions for a private sector recovery”, Zahawi identified financial services as one of his three priorities. Speaking the day before the publication of the Financial Services and Markets Bill, the new Chancellor set out how the Government will replace “hundreds of pieces of retained EU law” with a new vision for financial services. 

  • A green speech? Zahawi’s address to the financial and professional services sector took a surprisingly green turn, according to Green Alliance’s Zoë Toone and James Fotherby, but stopped short of fully linking his three key priorities with net zero ambitions. While demand management and green infrastructure can tackle inflation and private sector recovery, they argue, alignment between the financial sector and net zero targets could create opportunities that would “revitalise the London Stock Exchange”. 

Financial Services and Markets Bill. Following the Mansion House speech, the Government published its Financial Services and Markets Bill in response to its findings from the Future Regulatory Framework (FRF) review which concluded in February this year. Before publication, the Bill was tipped to be a “regulation bonfire” with outgoing Chancellor and Conservative leadership hopeful Rishi Sunak hoping that post-Brexit changes to regulation would result in a “Big Bang 2.0”. The bill is due to have its second reading in Parliament on 7th September this year.

  • The competitiveness agenda. At the heart of the proposed reforms is a focus on making ‘competitiveness’ a formal objective for regulators. There was previously such a competitiveness duty placed on regulators, but this was removed as part of the 2012 Financial Services Act. Writing for OpenDemocracy, Chaminda Jayanetti highlights that a Treasury consultation document published at the time partly blamed the competitiveness agenda for the financial crash, stating that there is “a strong argument that one of the reasons for regulatory failure leading up to the crisis was excessive concern for competitiveness”. 
  • Mistakes of the past. The competitiveness agenda “risks sleepwalking into the mistakes of the past”, argues the FT’s Helen Thomas. “A regulatory race to the bottom harms everyone except those who have something to keep from public scrutiny”, argues Professor Sir John Kay. In May, over 50 leading economists wrote to the Chancellor warning of the risks of a new regulatory goal of competitiveness. For more on the competitiveness agenda, see our Digest
  • “Cheerleaders for the City”. Regulators don’t want to be undermined by being tasked with becoming cheerleaders for the City”, argues Positive Money’s Fran Boait. Bank of England governor Andrew Bailey has warned of the proposed “call-in power” in the new bill that would allow the Treasury to override decisions made by regulators. 
  • What’s driving the “deregulation agenda”? The Government’s commitment to deregulation can be attributed to the “enormous power” of the financial sector, argues Boait. Over the past two years, financial institutions and individuals closely involved in the sector donated more than £15m to political parties and around a third of Treasury minister meetings are with financial institutions and their lobbyists.
  • Treasury committee pushback. The Treasury select committee has warned the Government of the risks of too much deregulation and of making competitiveness an objective for regulators. The committee argued that “pursuing international competitiveness in the short term is unlikely to lead to economic growth or international competitiveness in the long term if it is achieved by weakening the UK’s strong regulatory standards”. 
  • The alternative? Positive Money’s Fran Boait suggests that we must confront the “financialisation of all our public assets” and that the Treasury and Bank of England must instead work together to drive credit away from “property and speculative assets” towards a green transition. Central to this proposal is an “ecosystem of cooperatively or publicly owned banks” which would invest in the interests of communities rather than shareholders. 

Finance for our Future. A group of civil society organisations under the name of ‘Finance for our Future’ is calling on the Government to use the Financial Services and Markets Bill as an opportunity to “address the biggest challenges we face as a country today” including climate change, economic stability and accountability and transparency in financial sector lobbying. It has already made several media interventions and provided a briefing for MPs. The coalition, which includes the Finance Innovation Lab, Positive Money and the New Economics Foundation, has proposed six key recommendations, outlined below. 

  • 1.5 degrees. Finance for our Future urges the Government to oblige regulators to commit to “align the financial system and its regulation with the 1.5 degrees temperature goals of the Paris Agreement”. Finance Innovation Lab’s Jesse Griffiths raised concerns that the climate crisis is overlooked in the Government’s bill. 
  • Financial inclusion. Financial products and services, such as insurance, are often inaccessible to a large number of people. The coalition suggests mandating regulators to ensure that the financial system is inclusive. 
  • No statutory objective for competitiveness. Strongly opposing proposals for competitiveness objectives, the coalition argues that while there are plenty of organisations already promoting financial services, regulators should be there to act in the public interest and maintain independence. 
  • Parliamentary scrutiny. The joint statement warns that the current proposals risk giving too much unchecked power to the executive (the Treasury) via “opaque secondary legislation”. It therefore proposes establishing a new parliamentary committee, representing “all facets of public interest in the financial sector”. 
  • Checks on lobbyists. Current proposals “could facilitate untransparent lobbying that steers policy away from the public interest”, argues the group of organisations. It suggests that there should be a register of lobbyists and monthly reports by lobbyists on their communications with government, including written communications.
  • Stakeholder engagement. Finally, the coalition calls for a requirement of the Financial Conduct Authority and Prudential Regulation Authority’s statutory panels to consist of a maximum of 50% industry representatives and at least 50% public interest representatives. Currently, only one of the FCA’s panels is for consumers, while the PRA has no public interest panel at all. 
Weekly Updates

Climate change

UK Net Zero Strategy found to be unlawful. A landmark climate case has been brought to the High Court by Client Earth, Friends of the Earth and the Good Law Project. The High Court has ruled the UK government’s net zero strategy as unlawful for failing to spell out the quantified impact of each of its climate policies on emissions reductions, which only added up to 95% of the legally binding cuts required to meet the sixth carbon budget (2033-37). (This 95% figure assumes the government's plans can be “delivered in full”, but the Climate Change Committee’s more comprehensive assessment of the government’s policies warned of serious delivery risks - see our previous Digest for more analysis.)

UK media criticised over unserious coverage of extreme weather. Fridays for the Future Scotland have written an open letter to the UK media over their coverage of the European heatwave last week, demanding all coverage of heatwaves feature and be led by climate scientists, that all coverage names the climate crisis and communicates its severity, and that coverage must not use ‘fun in the sun’ imagery. 

Ramp up carbon offsetting vs preventing deforestation. Henry Paulson, Former US Treasury Secretary under George Bush and ex-CEO of Goldman Sachs argues that preventing deforestation is more effective that planting more trees, as “too often such programmes are used by governments looking for carbon offsets when they are unwilling to take more difficult steps to protect existing ecosystems…As a result, the hoped-for benefits may prove to be illusory.” (e.g. A carbon offsetting firm accidentally started a 35,000 acre forest fire in Spain last week.)

Racism and the environmental emergency. A new report from Greenpeace and the Runnymede Trust explains how the struggles of Black people, Indigenous Peoples and people of colour have repeatedly been ignored by those in positions of power. The report provides resources to “help consolidate anti-racist thinking and provide an overview of the role that systemic racism plays in the outcomes of environmental emergency today…Without solidarity with people of colour, and a rebalancing of power, there will be no just and equitable solutions to the environmental emergency.” (Video explainer here.)

What are the best stories to build support for climate action with ordinary voters? IPPR’s Fair Transition Unit has published a paper which finds the most persuasive messages on climate change are those of shared destiny or concern - ‘climate impacts’ ‘future generations’ & ‘global leadership’. The report provides “direction for campaigners looking to inoculate voters from the culture war division on climate change, and to build and sustain further public support for climate action.”

Public services

Tax reforms that helps childcare? Conservative Leadership candidate Liz Truss pledged to reform taxes to allow households to be treated as single tax entities, on grounds that the current personal allowance taxes penalise people for taking time off work to care for family members or children. Women’s Budget Group argued that this would be a “a disincentive to second earners, who are mainly women, with long-term impacts to financial resilience”, and that increasing child benefit and investing in childcare would be more effective.

NHS ‘backlogs taskforce’? Conservative Leadership candidate Rishi Sunak argues Britain is facing a ‘national emergency’ and promised “an emergency package to force down NHS waiting lists through tougher targets led by a ‘backlogs taskforce’.”  

Inflation and monetary policy

Wealth inequality and exposure to inflation. A report from the Resolution Foundation finds that wealth is increasingly being used to protect against inflation eroding households living standards, but the UK wealth gap (where the richest tenth of families have more wealth per adults than a whole family in the fifth decile) has grown to over £1.2m. Co-author Jack Leslie argues that the cost of living crisis is “exposing families who have no financial buffer to cope with rising cost pressures” and “policy makers must prioritise supporting these wealth-less households”.

Global food insecurity and the Ukrainian grain export agreement. Russia, Ukraine and Turkey have signed a grain export deal to free up millions of tonnes of grain stockpiles that have been stuck in Ukraine’s ports due to the war. The move is hoped to reduce wheat prices and ease global food insecurity. 

Expansionary fiscal policy = tight monetary policy? Liz Truss’ ‘economic guru’ warned that her plans to cut taxes by £30bn could necessitate the Bank of England raising interest rates to 7%, but argued this could be a good thing as it protects savings and kills off ‘zombie companies’.  

  • The case against monetary tightening and a new role for central banks. The FT’s Martin Sandbu lists a number of reasons against the tightening of monetary policy, proposes “a greater tolerance for supply driven inflation” and suggests that central banks should “take a role in credit allocation to promote investment”. (E.g. read Jens van’t Klooster’s paper on how the ECB could promote long-term lending to climate and energy investments.)

Fiscal policy and tax

Public want bill support and NHS funding, not tax cuts. Despite being the main argument in the Conservaitve leadership race, tax cuts are not the public’s main concern, according to new polling by Opinium and Progressive Britain. 63% (and 58% of those who voted Conservative in 2019) thought the NHS should be prioritised over cutting tax and over half thought energy bill support for struggling families was more important than tax cuts. 

Zahawi tax letters. Lawyers working on behalf of Nadhim Zahawi have allegedly sent threatening letters to tax campaigner Dan Neidle and others who have accused the new Chancellor of lying about his tax affairs. In the correspondence, Zahawi’s team told Neidle to seek the advice of a libel lawyer, according to the Times. Neidle claims that the Chancellor has avoided paying £4 million in personal tax and, despite the letters from Zahawi’s lawyers, has argued that “the public have the right to know”. 

Tax evasion losses. The government has pledged to publish how much money is lost through overseas tax evasion. Financial Secretary to the Treasury, Lucy Frazer, said that HMRC will calculate “a new standalone offshore tax gap” in 2023 having admitted last month that they “have no idea how much revenue is being lost to overseas tax havens”.

The political costs of austerity. A new paper by Ricardo Duque Gabriel, Mathias Klein and Sveriges Riksbank examines the link between “detrimental economic developments” and support for extreme parties using a database covering over 200 elections in several European countries. “Austerity-driven recessions amplify the political costs of economic downturns considerably by increasing distrust in the political environment”, they find.

Energy and ownership

Don’t Pay UK. Campaign group Don’t Pay UK are calling on people to stop paying their energy bills if companies don’t reduce them to an affordable level by 1st October. Local organiser Simon makes the case on Good Morning Britain, arguing that “huge swathes of the population” are affected by extortionate bills. It would only take 6,000 households to withhold their bills to force energy companies into action, according to New Economy Foundation’s Chaitanya Kumar. 

  • Stop energy bill increases. A new 38 degrees petition asks the Government and Ofgem to “stop and reverse the catastrophic energy bill increases - and make sure everyone is warm this winter”. The new energy price cap is due to be announced in August, with an increase expected to raise average household bills to over £3,000 per year. 
  • A key question for candidates. Conservative leadership hopefuls Rishi Sunak and Liz Truss must outline their plans to support people with rising energy bills, according to the BBC’s Economics editor Faisal Islam. Beyond existing support schemes, Sunak has so far not announced that he would introduce any further support packages, saying that it would depend on the level of the energy price cap. Meanwhile, Liz Truss’ solution is to cut green levies to reduce bills. 

Public ownership. The TUC has called for the public ownership of energy retail companies, arguing that this could reduce bills, speed up energy efficiency improvements to homes and cut carbon emissions faster. The TUC says that their ‘Affordable Energy Plan’ would bring down energy costs by ending shareholder dividends, incentivise government to make homes energy efficient and enable pricing structures with much lower costs for basic energy needs. They calculate the cost of nationalising the Big 5 energy retailers at £2.85bn.

Labour against public ownership. Rachel Reeves has said that Labour will not nationalise rail, water or energy if in power. The shadow chancellor argued that the policy of public ownership does not fit within her plans to restrict public spending under her new “fiscal rules”, but the leadership has since backtracked on the nationalisation of rail.

Industrial strategy and work

UK Critical Minerals Strategy. Business Secretary Kwasi Kwarteng has published a policy paper for the UK’s first Critical Minerals Strategy, outlining the government’s plans to secure the supply chain of minerals such as rare earth metals needed for the net zero transition. (CEN’s Jack Richardson provides a helpful summary of the strategy.)

Stewarding investment through public spending. Former chief economist at Goldman Sachs and ex-Treasury minister Jim O’Neill argues that the UK needs a coherent economic strategy to solve its productivity problems, including using “a more imaginative approach to government spending” e.g. through investing in venture capital and infrastructure. (Read the FT’s Martin Sandbu’s account of the “two lost decades for investment”.)

  • Tax cuts and breaks have limited effects. Jim takes aim at the use of corporate tax cuts to boost investment and has argued that increasing corporate profits that have “found their way into returns to shareholders and executives…lies at the heart of the productivity and low real wage dilemma that has dogged the UK economy”.

Strike-breaking legalised. The government has changed the law to allow businesses impacted by strike action to hire agency workers to mitigate disruption. Kwasi Kwarteng’s statement reads: “this was a criminal offence. Now it's an option for business." Unison is mounting a legal challenge in response, arguing that the Government is relying on a 7 year old consultation and flawed evidence to justify the law change.

“Growth, growth, growth”. Keir Starmer gave a speech outlining labour’s economic approach, stating that every policy the Shadow cabinet brings forward will be judged by its contribution to growth and productivity and committed to reestablishing the Industrial Strategy Council that was scrapped under Boris Johnson’s premiership. (Make UK welcomed the renewed focus on industrial strategy.)

  • Elements of Labour’s philosophy. Starmer praised a role for both “state and market…business and worker…the everyday economy and the technological frontier”, and cited approaches ranging from Janet Yellen’s ‘modern supply-side economics’, Gordon Brown’s ideas for new forms of economic devolution, and reiterated Labour’s new deal for working people and a plan to ‘Make Brexit Work’.
  • Degrowth dismissed. In the speech, Starmer championed Labour’s pledge to invest £28bn annually to tackle climate change, and rejected any tension between his pursuit of growth and achieving Net Zero, saying: “A plan for net-zero needs growth. A plan for growth needs net-zero.”