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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6 ways Brexit is ruining our food

A meat-eating chocolate-lover? You're in trouble.

We were warned. “We’ve got to get our act together”, said Tim Lang, Professor of Food Policy at City University London about an impending culinary crisis. He predicted that food would be the second biggest Brexit issue after the future of banking in the City of London. But whereas The City, ominously capitalised, is an ephemeral consideration for those outside the infamous metropolitan liberal elite, food certainly isn’t. Food affects us all – and so far it’s been hit hard by Brexit, after the value of the pound has been savaged, making importing to the UK more expensive. Here are six ways in which Brexit has is ruining our food.

Walnut Whip

The final insult. The sign that Brexit really has gone too far. It was announced yesterday that Walnut Whips would become nothing more than mere Whips. The reason given for this abomination was that the new range would cater for those who didn’t like, or were allergic to, nuts, allowing them to enjoy just the gooey, chocolatey goodness within. Closer inspection reveals that’s not quite the whole story. Walnut importers like Helen Graham, told the Guardian that the pound’s post-Brexit fall in value after last June, combined with “strong global demand” and a poor walnut yield in Chile, have led to Whips shedding the Walnut - not consumer demand. Nestlé say that individual packets and Christmas bumper packs will still be available - but at this rate, getting hold of them might prove harder in practice than in theory.

Marmite

2016’s Marmite shortages was perhaps the first sign that not all was well. Marmite is the ultimate Brexit metaphor: you either love it or hate it, a binary reflected in the 48-52 per cent vote – and the bitter taste it leaves for many. Marmite’s endangered status was confirmed after Tesco entered hostile negotiations with food megacorp Unilever, who wanted to raise trade prices by 10 per cent due to that inconvenient falling pound. Lynx deodorant, Ben & Jerry’s ice cream, Persil washing powder and PG Tips tea were similarly affected, but none inspired quite the same amount of outrage as the yeast-based spread.

Toblerone

The beauty of Toblerone is the frequency of its triangles. That angularity has been undermined by manufacturer Mondelēz’s decision to space them out, removing 10 per cent of the bar’s total chocolate in the process. Art has truly been tampered with. The scandal led to Colin Beattie MSP calling for the Scottish Parliament to offer condolences to triangle fans, blaming it directly on Brexit. Defending the change, a spokeswoman for Mondelēz said "this change wasn't done as a result of Brexit", suggesting it's part of the sad trend of chocolates getting skimpier. That said, they did admit that the current exchange rate was "not favourable" - and that in itself is directly due to Brexit. They also refused to be drawn on whether they'd be changing their signature chocolate in other EU territories. Hmm. Semantics aside, the dispute is getting legal. Poundland, who are seeking to bring out a "Twin Peaks" alternative to Toblerone echoing the brand's original shape but with two peaks per block instead of one, claim that Toblerone's shape is no longer distinctive enough to warrant a trademark. They claim that their new rival has "a British taste, and with all the spaces in the right places". Shots. Fired.

Cheddar

This one hurts more because it’s closer to home. Our Irish neighbours are reportedly considering turning away from cheddar to mozzarella. This act of dairy-based betrayal is understandable: if export tariffs to the UK go up, Irish cheese producers will have to sell their wares primarily on the continent – for which mozzarella would be a better fit. Tragic.

Chlorinated chicken

Ah, the big one. The subject of not only a transatlantic war of words, but also the source of strife within the cabinet. With the UK forced to look to the US for trade support, it was feared that the country's’ trademark chlorinated chicken would be forced upon these shores as a concession. International Trade Secretary Liam Fox called the media “obsessed” with the topic, dismissing fears over Britain’s meat of the future by saying that there is “no health risk”. Environment Secretary Michael Gove, however, said that there is no way that chlorinated chicken would reach British shelves. The row has faded away somewhat – but this game of chicken between these cabinet heavyweights may yet be renewed when Parliament reconvenes.

Hormone beef

Hormone beef is similarly contentious. US farmers raise cows on growth hormones to fatten them up for markets. As with chlorinated chicken, it’s a practice banned under EU law. It’s a touchy subject for US trade negotiators. Gregg Doud, a senior figure in Trump’s agriculture team, has said that accepting hormone beef is essential to any trade agreement. This debate, too, will presumably rumble on.

All told, it’s a good time to be a vegetarian, but a bad time to have a sweet tooth. Most of the upheaval rests around the weakness of the pound, so maybe the only way forward is to just eat good old homegrown British fruit. At least we'd all be healthier and more in pocket. Oh wait. Apparently British fruit harvests are in jeopardy too, given that most of our fruit is picked by short-term EU migrants. Ah, well, at least we've all got Boris Johnson to make sure that we can have our bananas curved, in packs of more than three.