Helena Morrissey (pictured) has put her weight behind an Institute for Public Policy Research (IPPR) report that is calling for a rebalance of the UK economy following Brexit, including reducing the country’s dependence on the financial services sector.
The IPPR proposals are part of a major commission launched in 2016 following the UK’s vote to leave the European Union. The report, Prosperity and justice: A plan for the new economy, calls for a transformation of the UK economy on par with the Kenyesian reforms in the 1940s or Thatcherite reforms during the 1980s with changes to minimum wage, taxes and monetary and fiscal policies.
Morrissey, the head of personal finance at Legal & General Investment Management, was joined by 21 other leaders in business and the community on the commission, including the Archbishop of Canterbury Justin Welby and McKinsey and Company global managing partner Dominic Barton.
The call to reduce the City’s dominance in the UK economy is part of a 10-part plan touted by the think tank in its final report.
Financial services in the UK economy
The report, published on Wednesday, calls for a “new industrialisation” strategy that would rebalance the economy away from an over-dependence on the City of London towards a more diverse array of industries.
This included manufacturing and other innovative, export-oriented industries.
The success of the City was blamed for keeping sterling high to the detriment of the manufacturing industry, which now makes up just 10% of the UK economy. The report criticised the fact the UK trade deficit had exceeded 2% for 15 of the last 16 years.
To rebalance the economy away from finance, the IPPR proposed universities could be the focal point for “innovation-based industrial clusters” with a National Investment Bank able to provide long-term finance for start-ups to become major exporting businesses.
Shareholder short-termism
The report criticises short-term shareholder returns and said there need to be incentives that instead encourage long-term productive investment. However, it also championed open markets to reduce the “near-monopoly” power of dominant companies.
The UK competition regime needs to be reformed for the digital age so that some companies, such as digital platforms, are regulated in a comparable way to utilities. Companies like Google, Apple, Facebook and Amazon risk excessive concentration in markets, the report warned.
Public and private investment is around 17% of GDP, around 4% lower than other developed countries, the report said. R&D investment is also lower than the UK’s peers.
Alongside financial markets short-termism, the report blamed low investment on a banking sector overly focused on lending for land and property and a lack of demand.
The IPPR’s 10-point plan for the UK economy
- Reshaping the economy through industrial strategy The report looks to Germany and the EU for a model to address the lack of long-term investment in the UK economy, namely public investment banks. Direct funding for innovation from a National Investment Bank would replace the patent box and the R&D levy, for all but the youngest SMEs. The apprentice levy should be replaced with a skills and training levy. The report also rejects the Conservative government’s focus on immigration reduction targets and called for a policy that promoted human dignity.
- Securing good jobs, good pay and good lives The paper calls for the minimum wage to be raised to £8.75 an hour outside London and a 20% higher minimum wage to apply to zero hours contracts. The paper called for the rise of trade unions with an aim of doubling collective bargaining coverage to 50% of workers by 2030. It suggested an auto-enrolment system for the gig economy roles into a union. It called for further pay gap reporting, including for ethnic pay gaps.
- Turning business towards long-term success The report again looked to the EU for ‘stakeholder-based’ corporate governance models that balance the interest of shareholders with employees. It proposed worker appointments to boards, including on remuneration committees.
- Promoting open markets in the new economy The report proposes widening the remit of the Competition and Markets Authority to cover the public good rather than focusing on consumer welfare in particular. The establishment of the Office of Digital Platforms, which would regulate major businesses in a similar way to utility companies.
- Raising public investment in a reformed macroeconomic framework Austerity and quantitative easing have pulled macroeconomic policy in opposite directions with one reducing and the other attempting to stimulate demand. As result, the sustained growth required to return to normal policies has failed, leaving the UK in a precarious position to face the next recession. The IPPR calls for a £15bn increase in public spending by 2022 and for the Bank of England to be given the power to ask the National Investment Bank to expand lending in the real economy, and to buy its bonds to ensure this can be financed.
- Strengthening the financial system While the City contributes around 7% to GDP, the report criticises the industry’s shortcomings. Namely, encouraging short-termism among businesses and playing a role in sterling remaining higher than it otherwise would have been. The report calls for a better alignment of incentives between savers and institutional investors, and their intermediaries and the companies whose shares they own. It also calls for a clamp down on tax avoidance and illicit capital flows into the UK, including more transparency around persons with significant control in companies.
- Spreading wealth and ownership across the economy The report calls for a £10,000 ‘universal minimum inheritance’ to all young people at the age of 25 distributed from a new sovereign wealth fund. The report calls for changes to planning laws and housing development to aid more young people on to the housing ladder. It also calls for a new government act to support the expansion of the co-operative and mutual sector.
- Designing simpler and fairer taxes UK tax revenues are considerably lower than the average for developed countries at 33% of GDP. This will leave a fiscal gap as the population ages. On average the poorest fifth of households pay 35 per cent of their gross income in tax, which is more than the richest fifth, the report says. It calls for the abolition of tax bands, replaced with a gradually rising marginal rate of tax as incomes rise. Dividend and capital gains should be incorporated into the income tax schedule. IHT should be abolished for a lifetime gifts allowance of £125,000. The report proposes raising the corporate tax rate to 24%, still the lowest in the G7 up from the current 19%.
- Ensuring environmental sustainability The report calls on the development of a green industrial strategy. This would integrate demand side policies on decarbonisation, achieving a zero-waste ‘circular’ economy and sustaining natural capital with supply-side support for UK businesses and innovation to meet these goals.
- Creating a new economic constitution The report calls for the decentralisation of economic powers and resources in response to the deindustrialisation process, which has resulted in inequalities between different regions and countries with in the UK. The paper calls for the European Regional Development and Social Funds to be replaced by a £10bn Inclusive Growth Fund (IGF).
