Grant Shapps should give Obama his campaign line back

The Conservative chairman borrows Obama's "don't give them the keys back" line. But it's his party that crashed the car again.

It's well known that most Conservative cabinet ministers supported Barack Obama's re-election and in an interview in today's Independent, Tory chairman Grant Shapps borrows one of the US president's favourite campaign lines.

Shapps tells the paper: "We are in a global race. Britain is on the right track, don't go back. Don't give the keys to the guys who crashed the car in the first place. Do you want to go through all this pain again?"

Obama told a Democratic fundraiser in May 2010: "So after they drove the car into the ditch, made it as difficult as possible for us to pull it back, now they want the keys back.  No! You can’t drive! We don't want to have to go back into the ditch! We just got the car out! We just got the car out!" He used the analogy again at a labour day rally in Milwaukee in September of that year.

It's a good line, but unfortunately for Shapps it's not one the Conservatives have any right to use. While the US economy enjoyed a sustained recovery under Obama (with 13 consecutive quarters of growth), the UK fell into a double-dip recession (and is at risk of a triple-dip). To adapt Obama's analogy, the Tories didn't drive the car out of the ditch; they drove it back in (you could call it a double-ditch recession).

When Labour left office, the economy was recovering, with growth of 0.4 per cent in Q3 of 2009, 0.4 per cent in Q4, 0.6 per cent in Q1 of 2010 and 0.7 per cent in Q2 (see this table for the full data). Since then, it has stagnated. Over the last year, the US economy has grown by 2.3 per cent, while the UK hasn't grown at all. As a result, while the US economy is now 2.3 per cent above its pre-recession peak, the UK remains 3.1 per cent below.

If and when Shapps's party boasts a comparable record, he might be entitled to borrow Obama's line. But until then, he should gracefully return it to its original owner.

Conservative chairman Grant Shapps speaks at the party's conference in Birmingham last year. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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Let's turn RBS into a bank for the public interest

A tarnished symbol of global finance could be remade as a network of local banks. 

The Royal Bank of Scotland has now been losing money for nine consecutive years. Today’s announcement of a further £7bn yearly loss at the publicly-owned bank is just the latest evidence that RBS is essentially unsellable. The difference this time is that the Government seems finally to have accepted that fact.

Up until now, the government had been reluctant to intervene in the running of the business, instead insisting that it will be sold back to the private sector when the time is right. But these losses come just a week after the government announced that it is abandoning plans to sell Williams & Glynn – an RBS subsidiary which has over 300 branches and £22bn of customer deposits.

After a series of expensive delays and a lack of buyer interest, the government now plans to retain Williams & Glynn within the RBS group and instead attempt to boost competition in the business lending market by granting smaller "challenger banks" access to RBS’s branch infrastructure. It also plans to provide funding to encourage small businesses to switch their accounts away from RBS.

As a major public asset, RBS should be used to help achieve wider objectives. Improving how the banking sector serves small businesses should be the top priority, and it is good to see the government start to move in this direction. But to make the most of RBS, they should be going much further.

The public stake in RBS gives us a unique opportunity to create new banking institutions that will genuinely put the interests of the UK’s small businesses first. The New Economics Foundation has proposed turning RBS into a network of local banks with a public interest mandate to serve their local area, lend to small businesses and provide universal access to banking services. If the government is serious about rebalancing the economy and meeting the needs of those who feel left behind, this is the path they should take with RBS.

Small and medium sized enterprises are the lifeblood of the UK economy, and they depend on banking services to fund investment and provide a safe place to store money. For centuries a healthy relationship between businesses and banks has been a cornerstone of UK prosperity.

However, in recent decades this relationship has broken down. Small businesses have repeatedly fallen victim to exploitative practice by the big banks, including the the mis-selling of loans and instances of deliberate asset stripping. Affected business owners have not only lost their livelihoods due to the stress of their treatment at the hands of these banks, but have also experienced family break-ups and deteriorating physical and mental health. Others have been made homeless or bankrupt.

Meanwhile, many businesses struggle to get access to the finance they need to grow and expand. Small firms have always had trouble accessing finance, but in recent decades this problem has intensified as the UK banking sector has come to be dominated by a handful of large, universal, shareholder-owned banks.

Without a focus on specific geographical areas or social objectives, these banks choose to lend to the most profitable activities, and lending to local businesses tends to be less profitable than other activities such as mortgage lending and lending to other financial institutions.

The result is that since the mid-1980s the share of lending going to non-financial businesses has been falling rapidly. Today, lending to small and medium sized businesses accounts for just 4 per cent of bank lending.

Of the relatively small amount of business lending that does occur in the UK, most is heavily concentrated in London and surrounding areas. The UK’s homogenous and highly concentrated banking sector is therefore hampering economic development, starving communities of investment and making regional imbalances worse.

The government’s plans to encourage business customers to switch away from RBS to another bank will not do much to solve this problem. With the market dominated by a small number of large shareholder-owned banks who all behave in similar ways (and who have been hit by repeated scandals), businesses do not have any real choice.

If the government were to go further and turn RBS into a network of local banks, it would be a vital first step in regenerating disenfranchised communities, rebalancing the UK’s economy and staving off any economic downturn that may be on the horizon. Evidence shows that geographically limited stakeholder banks direct a much greater proportion of their capital towards lending in the real economy. By only investing in their local area, these banks help create and retain wealth regionally rather than making existing geographic imbalances worce.

Big, deep challenges require big, deep solutions. It’s time for the government to make banking work for small businesses once again.

Laurie Macfarlane is an economist at the New Economics Foundation