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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What kind of Christian is Theresa May?

And why aren’t we questioning the vicar’s daughter on how her faith influences her politics?

“It is part of me. It is part of who I am and therefore how I approach things,” Theresa May told Kirsty Young when asked about her faith on BBC Radio 4’s Desert Island Discs in November 2014. “I think it’s right that we don’t sort of flaunt these things here in British politics but it is a part of me, it’s there, and it obviously helps to frame my thinking.”

The daughter of a Church of England vicar, Rev. Hubert Brasier, May grew up an active Christian in Oxfordshire. She was so involved in parish life that she even taught some Sunday school classes. She goes on in the Desert Island Discs interview to choose the hymn When I Survey the Wondrous Cross sung by a chapel congregation, and recalls being alone in church with her parents, kneeling and singing together.

Despite her intense attachment to local CofE life, Theresa May’s role as a Christian in politics is defined more by her unwillingness to “flaunt” (in her words) her faith.

Perhaps this is partly why, as a Christian, May avoided the scrutiny directed at Lib Dem leader and evangelical Christian Tim Farron over the past week of his stance on homosexuality and abortion.

As Farron wriggled – first saying he didn’t want to make “theological pronouncements” on whether or not being gay is a sin (and then, days later, announcing that it isn’t) – May’s critics scratched their heads about why her voting record on such matters isn’t in the media spotlight.

She has a socially conservative voting record when it comes to such subjects. As the journalist and activist Owen Jones points out, she has voted against equalising the age of consent, repealing Section 28, and gay adoption (twice).

Although her more recent record on gay rights is slightly better than Farron’s – she voted in favour of same-sex marriage throughout the process, and while Farron voted against the Equality Act Sexual Orientation Regulations in 2007 (the legislation obliging bed and breakfast owners and wedding cake makers, etc, not to discriminate against gay people), May simply didn’t attend.

May has also voted for the ban on sex-selective abortions, for reducing the abortion limit to 20 weeks, abstained on three-parent babies, and against legalising assisted suicide.

“Looking at how she’s voted, it’s a slightly socially conservative position,” says Nick Spencer, Research Director of the religion and society think tank Theos. “That matches with her generally slightly more economically conservative, or non-liberal, position. But she’s not taking those views off pages of scripture or a theology textbook. What her Christianity does is orient her just slightly away from economic and social liberalism.”

Spencer has analysed how May’s faith affects her politics in his book called The Mighty and the Almighty: How Political Leaders Do God, published over Easter this year. He found that her brand of Christianity underpinned “the sense of mutual rights and responsibilities, and exercising those responsibilities through practical service”.

May’s father was an Anglo-Catholic, and Spencer points out that this tradition has roots in the Christian socialist tradition in the early 20th century. A world away from the late Victorian Methodism that fellow Christian Margaret Thatcher was raised with. “That brought with it a package of independence, hard work, probity, and economic prudence. They’re the values you’d get from a good old Gladstonian Liberal. Very different from May.”

Spencer believes May’s faith focuses her on a spirit of citizenship and communitarian values – in contrast to Thatcher proselytising the virtues of individualism during her premiership.

Cradle Christian

A big difference between May and Farron’s Christianity is that May is neither a convert nor an evangelical.

“She’s a cradle Christian, it’s deep in her bloodstream,” notes Spencer. “That means you’re very unlikely to find a command-and-control type role there, it’s not as if her faith’s going to point her in a single direction. She’s not a particularly ideological politician – it’s given her a groundwork and foundation on which her politics is built.”

This approach appears to be far more acceptable in the eyes of the public than Farron’s self-described “theological pronouncements”.  May is known to be a very private politician who keeps her personal life, including her ideas about faith, out of the headlines.

“I don’t think she has to show off, or join in, she just does it; she goes to church,” as her former cabinet colleague Cheryl Gillan put it simply to May’s biographer Rosa Prince.

The voters’ view

It’s this kind of Christianity – quiet but present, part of the fabric without imposing itself – that chimes most with British voters.

“In this country, given our history and the nature of the established Church, it's something that people recognise and understand even if they don't do it themselves,” says Katie Harrison, Director of the Faith Research Centre at polling company ComRes. “Whether or not it’s as active as it used to be, lots of people see it as a nice thing to have, and they understand a politician who talks warmly about those things. That’s probably a widely-held view.”

Although church and Sunday school attendance is falling (about 13 per cent say they regularly attend Christian religious services, aside from weddings and funerals), most current surveys of the British population find that about half still identify as Christian. And ComRes polling in January 2017 found that 52 per cent of people think it’s important that UK politicians and policy-makers have a good understanding of religion in the UK.

Perhaps this is why May, when asked by The Sunday Times last year how she makes tough decisions, felt able to mention her Christianity:  “There is something in terms of faith, I am a practising member of the Church of England and so forth, that lies behind what I do.”

“I don’t think we’re likely to react hysterically or with paranoid fear if our politicians start talking about their faith,” reflects Spencer. “What we don’t like is if they start ‘preaching’ about it.”

“Don’t do God”

So if May can speak about her personal faith, why was the nation so squeamish when Tony Blair did the same thing? Notoriously, the former Labour leader spoke so frankly about his religion when Prime Minister that his spin doctor Alastair Campbell warned: “We don’t do God.” Some of Blair’s critics accuse him of being driven to the Iraq war by his faith.

Although Blair’s faith is treated as the “watershed” of British society no longer finding public displays of religion acceptable, Spencer believes Blair’s problem was an unusual one. Like Farron, he was a convert. He famously converted to Catholicism as an adult (and by doing so after his resignation, side-stepped the question of a Catholic Prime Minister). Farron was baptised at 21. The British public is more comfortable with a leader who is culturally Christian than one who came to religion in their adulthood, who are subjected to more scrutiny.

That’s why Gordon Brown, David Cameron and Theresa May can get away with talking about their faith, according to Spencer. “Brown, a much more cultural Presbyterian, used a lot of Biblical language. Cameron talked about it all the time – but he was able to do so because he had a vague, cultural, undogmatic Anglicanism,” he tells me. “And May holds it at arm’s length and talks about being a clergyman’s daughter, in the same way Brown talked about his father’s moral compass.”

This doesn’t stop May’s hard Brexit and non-liberal domestic policy jarring with her Christian values, however. According to Harrison’s polling, Christian voters’ priorities lie in social justice, and tackling poverty at home and overseas – in contrast with the general population’s preoccupations.

Polling from 2015 (pre-Brexit, granted) found that practising Christians stated more concern about social justice (27 per cent) than immigration (14 per cent). When entering No 10, May put herself “squarely at the service of ordinary working-class people”. Perhaps it’s time for her to practise what she preaches.

Anoosh Chakelian is senior writer at the New Statesman.

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