Thursday’s budget proved to be a red letter day for the City of London. In the moments after Jeremy Hunt delivered his perfumed message to the Square Mile, shares in all the big players, from HSBC to Legal & General, climbed back to where they had been before September’s disastrous mini-budget.
Bankers, fearing the worst for their bonuses in the days before the fifth financial statement of the year, could look forward to filling their savings accounts once again. Like energy bosses, the chiefs who guard the financial district feared a windfall tax and worse – the retention, post-Brexit, of EU regulations that prevent the insurance and fund management industry from indulging in reckless behaviour.
Instead, they learned that a tired Treasury, bereft of ideas to boost investment, had opted for another round of deregulation in a desperate bid to generate money from somewhere other than the exchequer. The chancellor told the Commons: “We learned from the success of Nigel Lawson’s big bang in 1986 that smart regulatory reform can spur investment from all over the world.”
Lawson’s big bang laid the groundwork for the 2008 big crash, but any concern that the two events were connected was set aside by Hunt. “Nearly 40 years on, we must stay true to its mission to make the UK the world’s most innovative and competitive global financial centre,” he said. The message was clear: when public money is running dry, unleash the dogs of private finance to boost growth.
Hunt’s main focus was on the EU rules, known as Solvency II, that govern how insurers and fund managers can invest in long-term infrastructure projects. Everyone agrees they need updating. Brussels is debating changes. But not everyone agrees on how to change them and keep the City of London from straying into deeply unsafe territory.
Financiers have lobbied hard for a regulatory bonfire, with the promise that investments will be targeted at the north and west of England, complementing the government’s levelling up agenda. The Bank of England, which acts as the regulator of the finance industry among its other duties, wanted there to be a price for venturing into long-term projects that, in the worst scenarios, incur losses and even go bust before there is a payday for the investor.
Hunt overruled the regulator. “To further support investment across our economy, I can also announce we are publishing our decision on Solvency II, which will unlock tens of billions of pounds of investment for our growth-enhancing industries,” he said.
And not only that: he also slashed a tax surcharge on bank profits at a cost to the Treasury of an estimated £1.4bn a year – money that will now have to be found elsewhere.
He confirmed a decision to scrap the cap on bankers’ bonuses, introduced in 2014 across the EU and removed by his predecessor Kwasi Kwarteng in September, handing the industry another adrenaline boost.
These measures not only widen already growing income and wealth gaps across the country: they distort the response of policymakers to the current economic crisis.
A glance at the pay figures shows the finance industry has fuelled the growth in average earnings over the last year. Pay without bonuses was up 6.2% in the business services and finance sector, as defined by the Office for National Statistics. Average pay across all industries without bonuses was up 5.7%.
Higher interest rates are justified as a way to quell rising wages and prevent inflation becoming entrenched, except central bankers never talk about where the impetus for rising pay is coming from.
Coincidentally, higher interest rates will also help the banking sector’s profits and no doubt will spur even higher bonus payments.
Ever since the financial crash, banks have complained they cannot make a decent return while the cost of borrowing is at or near zero. They are forced to keep money parked in reserves and this cash earns almost nothing in interest. Mortgage lending is the usual avenue to riches. Between 80% and 90% of lending by high street banks is for mortgages and competition has been fierce.
These days money on deposit earns a handsome return. And millions of people will either need to remortgage next year or will be on variable rates and already suffering from high monthly bills.
Expect bumper bank profits. Don’t expect an investment boom in beleaguered regions.
It is no use praying for a house price crash to bring back a sense of normality. Such is the government’s dependence on the banks and the rest of the finance and property sectors – for everything from tax revenues to foreign exchange and employment – we all lose when that happens. The consequences of the 2008 crash, which Hunt now ignores, showed us that.