Planning for a rainy day: why Britain needs a financial stability fund

We've got to try and prevent the next crisis – but also plan for what happens if we don't, writes Victoria Barr

Even with robust reform of financial sector regulation, it would be a mistake to think that a financial crisis could never happen again. With the benefit of hindsight, we can now observe a long trend in political economy in which the lessons of the 1930s were forgotten over time: depression-era restrictions separating investment from retail banking were eroded in the US, while in the UK, a "light-touch" approach to financial sector regulation was pursued by both Labour and Conservative governments.

Over time, new cohorts of personnel will staff central banks. They will have learned about the recent crisis from textbooks rather than personal experience, and will be influenced by new intellectual agendas. Within the financial sector, a new generation of bankers will emerge, confident about the merits of their financial innovation and impatient with the fussiness of their compliance departments. Finally, future politicians, mindful of the importance of the City to British economic performance, may be swayed by persuasive arguments to relax capital adequacy requirements; to allow economies of scale to be exploited from the greater fusion of retail and investment banking; or to celebrate a merger which turns a national champion into an international behemoth, ignoring that the bank may have become too big for one sovereign to bail out alone. These processes are not inevitable, but they are not impossible to imagine over, say, the next seventy years.

The concern that the financial crisis may reoccur lies behind many of the current regulatory reforms. However, the risk of reoccurrence also has implications for the management of the public finances. If financial fragility builds up, unnoticed or ignored, during stable economic periods, then it is possible that economic and fiscal forecasts could be out by a wide margin. The Treasury’s public finance forecasts and decision-making on levels of taxation and spending before 2008 were based on the expectation that the UK economy would continue to grow at around 2.5 per cent per year. This expectation was very much in line with the consensus view among independent forecasters at the time. However, the latest estimate of what the UK’s average annual growth rate will end up being between 2007/08 and 2016/17 is less than half that, at 1.2 per cent.

The UK was hit particularly hard by the financial crisis, partly because it has a large financial services industry relative to the size of the economy. The City is a source of great economic strength for Britain, a sector in which we excel internationally and which, in good times, provides a healthy stream of revenue for the Exchequer. However, as recent events have clearly demonstrated, it also brings with it fragility and risk. In this regard, it shares some of the characteristics of the so-called "natural resource curse", where the discovery of natural resources, like oil, brings great wealth to a country, but also fiscal volatility and other undesirable side effects.

Many countries have attempted to avoid the natural resource curse through the introduction of revenue stabilisation funds, which aim to smooth income over time and insulate the rest of the economy from the impact of natural resources exploitation. In fact, countries have also introduced similar "accounts", sometimes called sovereign wealth funds, to achieve a range of other objectives: to meet certain fiscal targets; to save to meet long-term obligations; and to anticipate the costs of future financial crises.

Such an approach has attractive properties for the UK. The government should establish a Financial Services Revenue Stabilisation Account, or "rainy day fund", which could only be accessed in the event of a serious financial crisis. In addition to supporting measures to maintain stability in the banking sector, the funds in the account could also be used to counteract the negative impact of a financial crisis on the wider economy (such as measures to boost aggregate demand (e.g. tax cuts) or to avoid cuts to public services).

The planned size of the fund should be subject to further analysis. As the fund is only intended for use in serious financial crises, it should be possible to allow the fund to build up over time. The monies in the fund should be invested conservatively in counter-cyclical and liquid assets, able to withstand the asset price volatility which accompanies financial crises and which can be accessed quickly without the liquidation of the fund itself causing market turmoil.

The fund is intended to improve the management of tax revenues in a country with a large financial sector. However, for simplicity, payments into the account need not be explicitly hypothecated from particular revenues from the financial services sector, although this would be the spirit of the fund. We do not recommend an additional levy to pay for contributions to the fund.

The disadvantage of a Stabilisation Account is the opportunity cost of locking tax revenues away. The funds invested in the account could otherwise be used for different purposes, such as investment, reducing taxes or paying down the national debt. These are not trivial concerns.  However, the contingency function of the fund, and the capability to respond to a serious crisis that it would give a future government, are sufficiently important to warrant foregoing other expenditure in the short term. 

At the current time, we remain in the middle of an economic crisis, and the government’s priority must be to jump start the economy out of the current slump. Payments into the Stabilisation Account should therefore not commence until the economy is growing strongly again.

In addition to regulatory reform to reduce the likelihood of a financial crisis occurring again, Labour should acknowledge that crises are difficult to predict and economic forecasting prone to error. A ‘rainy day fund’ would ensure that any future government is better placed to take action during a crisis and signal the Labour party’s commitment to securing Britain’s long-term economic stability.

A Rainy Day Fund: Why Britain needs a financial sector revenue stabilisation fund is published today by the Fabian Society – click here to read the full publication.

Photograph: Getty Images

Victoria Barr is an economist at FTI Consulting. She has previously worked at Frontier Economics, the World Bank and as the Economy and Welfare Policy Of?cer at the Labour party during the 2010 general election.

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Let's face it: supporting Spurs is basically a form of charity

Now, for my biggest donation yet . . .

I gazed in awe at the new stadium, the future home of Spurs, wondering where my treasures will go. It is going to be one of the architectural wonders of the modern world (football stadia division), yet at the same time it seems ancient, archaic, a Roman ruin, very much like an amphitheatre I once saw in Croatia. It’s at the stage in a new construction when you can see all the bones and none of the flesh, with huge tiers soaring up into the sky. You can’t tell if it’s going or coming, a past perfect ruin or a perfect future model.

It has been so annoying at White Hart Lane this past year or so, having to walk round walkways and under awnings and dodge fences and hoardings, losing all sense of direction. Millions of pounds were being poured into what appeared to be a hole in the ground. The new stadium will replace part of one end of the present one, which was built in 1898. It has been hard not to be unaware of what’s going on, continually asking ourselves, as we take our seats: did the earth move for you?

Now, at long last, you can see what will be there, when it emerges from the scaffolding in another year. Awesome, of course. And, har, har, it will hold more people than Arsenal’s new home by 1,000 (61,000, as opposed to the puny Emirates, with only 60,000). At each home game, I am thinking about the future, wondering how my treasures will fare: will they be happy there?

No, I don’t mean Harry Kane, Danny Rose and Kyle Walker – local as well as national treasures. Not many Prem teams these days can boast quite as many English persons in their ranks. I mean my treasures, stuff wot I have been collecting these past 50 years.

About ten years ago, I went to a shareholders’ meeting at White Hart Lane when the embryonic plans for the new stadium were being announced. I stood up when questions were called for and asked the chairman, Daniel Levy, about having a museum in the new stadium. I told him that Man United had made £1m the previous year from their museum. Surely Spurs should make room for one in the brave new mega-stadium – to show off our long and proud history, delight the fans and all those interested in football history and make a few bob.

He mumbled something – fluent enough, as he did go to Cambridge – but gave nothing away, like the PM caught at Prime Minister’s Questions with an unexpected question.

But now it is going to happen. The people who are designing the museum are coming from Manchester to look at my treasures. They asked for a list but I said, “No chance.” I must have 2,000 items of Spurs memorabilia. I could be dead by the time I finish listing them. They’ll have to see them, in the flesh, and then they’ll be free to take away whatever they might consider worth having in the new museum.

I’m awfully kind that way, partly because I have always looked on supporting Spurs as a form of charity. You don’t expect any reward. Nor could you expect a great deal of pleasure, these past few decades, and certainly not the other day at Liverpool when they were shite. But you do want to help them, poor things.

I have been downsizing since my wife died, and since we sold our Loweswater house, and I’m now clearing out some of my treasures. I’ve donated a very rare Wordsworth book to Dove Cottage, five letters from Beatrix Potter to the Armitt Library in Ambleside, and handwritten Beatles lyrics to the British Library. If Beckham and I don’t get a knighthood in the next honours list, I will be spitting.

My Spurs stuff includes programmes going back to 1910, plus recent stuff like the Opus book, that monster publication, about the size of a black cab. Limited editions cost £8,000 a copy in 2007. I got mine free, as I did the introduction and loaned them photographs. I will be glad to get rid of it. It’s blocking the light in my room.

Perhaps, depending on what they want, and they might take nothing, I will ask for a small pourboire in return. Two free tickets in the new stadium. For life. Or longer . . . 

Hunter Davies is a journalist, broadcaster and profilic author perhaps best known for writing about the Beatles. He is an ardent Tottenham fan and writes a regular column on football for the New Statesman.

This article first appeared in the 16 February 2017 issue of the New Statesman, The New Times