Setting out the so-called Leeds reforms during a summit with top City executives in West Yorkshire, Rachel Reeves (pictured above) told financial chiefs that the changes were about “freeing up firms to take risks and to drive growth”.
The plans are widely seen as a major win for the City after intensive lobbying, and a win for Reeves, who has worked hard to keep financial leaders on side during Labour’s turbulent first year in power.
The spending review last month, which focused on large, long-term infrastructure projects, gave the chancellor the reset she needed. But then came the debacle over the welfare cuts, where Reeves was in tears during prime minister’s questions.
“She was seen very personally to have been involved in that and indeed was seen to have held out to the last minute,” Heather told me. “She was very intimately involved with the winter fuel allowance issue. She’s also the person who has to fill the gap in the public finances created by those U-turns. She’s under absolutely huge pressure.”
While there were some who expected her to resign, Starmer and Reeves are very close, Heather added. “They share a project. She’s absolutely key to his policies, so it’s hard to see her being ousted. This is a moment for her to get back out there and try to deliver a more positive message – back to ‘Here’s how I want to grow the economy and why I want to do that’.”
For that, she is banking on deregulation, hoping it will have a “ripple effect” on the pockets of working people.
Cutting red tape
The first theme in Reeves’s announcement is deregulation. Under the Leeds reforms, “unnecessary financial red tape will be drastically cut”, according to the Treasury. The chancellor described such regulation as “a boot on the neck” of businesses.
While the language being used by Reeves and the Treasury is bombastic, Heather said, that’s not how it is landing in the financial sector. “They’re selling it as quite radical, but when you talk to experts in the financial services sector, they say it’s smallish tweaks – things that banks and financial sector firms have been complaining about – and it’s trying to make their lives a bit easier day to day.”
We’ve heard similar language from Reeves before. In November, she told City bankers attending her Mansion House speech that regulations put in place to protect the economy after the 2008 global financial crisis had “gone too far”. She described the sector as the “crown jewel” of the UK economy, and promised to unleash its potential.
Heather, who reported on the 2008 crash, said: “There’s a sharp intake of breath when politicians say this economy really needs to unleash the financial sector because it’s very big and it has been known for doing speculative, risky things.”
But she understands why Reeves is keen to keep city bankers on her side. “The public finances are quite tight. We’ve borrowed a lot over the last few years and the markets are slightly strained. You can’t endlessly keep borrowing more and keep chucking those gilts out into the market. So you’ve got to try to get investment. She’s increasing public investment quite a lot, but also she thinks there’s not enough private investment in the economy. She belies some of these companies and private investors are going to bring it in.”
Backing first time homeowners – or burdening them?
The announcement also pointed to recent loosening of mortgage rules, which allows people to take out bigger mortgages relative to their annual income. The move could end up helping 36,000 more first-time buyers on to the housing ladder each year, according to the Bank of England.
Nationwide Building Society said it was lowering the annual salary needed to qualify for its 95% Helping Hand mortgage to £30,000, down from £35,000. Joint applicants will need a combined salary of £50,000, down from £55,000.
There are two sharp reactions to this, Heather explained. “On one side you’re allowing homeowners to buy who might not otherwise be able to get a foot on the ladder to buy a home. But the other side of it asks: are you allowing people to saddle themselves with absolutely massive or unpayable debts?”
Notably, it is the concerns of the latter that the Telegraph decided to put on their front page on Tuesday, asking if more risky loans would ultimately increase the likelihood of people’s homes being repossessed.
Heather said: “The other thing that was confirmed was if you’ve been consistently paying your rent, then that can count as evidence towards your mortgage, which seems sensible … There are also things like a concierge service for big investors. So you’ll have a particular contact person in the government.”
Later at Mansion House, Reeves confirmed plans to “radically streamline” accountability rules for senior bankers and to review ringfencing rules, introduced after the 2008 financial crisis to protect consumer cash from a bank’s riskier activities, in the coming months. The chancellor also approved a new industry-funded advertising campaign to encourage consumers to invest their savings in stocks.
Heather described this package as a combination of “sensible tidying up” and trying to attract “big money” to the UK. The timing and politics of this are particularly interesting, Heather added, with Reeves under pressure to raise more money from the super-rich, while also promoting the message: “Please come to the UK!”
Trickle-down, rebranded?
Reeves has talked about these plans having a “ripple effect” on the rest of the economy, which has several left thinktanks fearing that marks a return to “trickle-down economics”.
The campaign group Positive Money said academic evidence shows financial sector growth does not ‘trickle down,’ while the New Economics Foundation and the Finance Innovation Lab warned that further deregulation risks another financial crisis and suggests lessons from the 2008 crash are being ignored.
Heather is unsure that these announcements will create that broad prosperity Labour is desperate for. “If what she’s suggesting is, ‘Let’s have a big financial sector and that’s great for the economy,’ the evidence doesn’t really stack up. In fact, it can make things riskier, as we saw during the financial crisis,” she said. “In the past, the UK’s financial sector has tended to be very good at speculative property investment and at what’s going on in the City, but we are a country that has had low levels of investment in infrastructure; our companies don’t invest as much as they do in other major economies and our government doesn’t invest as much. That’s a key part of why we haven’t grown as fast as we probably should have done.
“Where our productivity’s been weak is because our workers have less stuff to work with, less tech, less infrastructure, the transport is rubbish, etc. We’ve had a really big financial sector through a lot of that time – and we’ve got underinvestments. So it’s not clear to me that somehow unleashing this sector further is going to bring funds. It might create some jobs in different cities around the country, which we’re good at, but the idea that it’s going to bring some major change? I’m sceptical.”
