Labour’s alliance with the City presents new challenges

Whatever Labour says before the general election about its future state spending plans to promote essential ‘green growth’, it is turning to powerful corporate interests for most of the investment it will require.  “This is a Labour Party more committed to working with private enterprise than ever before”, Keir Starmer has confirmed, adding “anyone who expects an incoming Labour government to quickly turn on the spending taps is going to be disappointed”.[1]  The ‘ultra-Blairite’ Jim Murphy, former Labour Secretary of State for Scotland, believes a Starmer administration would be “the first private sector government in Labour’s history”.[2]  A future Labour government, conscious of recent disturbingly low levels of UK business investment, will seek to incentivise private corporations to remedy this deficiency and secure sustainable economic progress.  While most Labour Party members will share some ideological concern over this development, the approaching election will postpone serious internal party debate.  Significant practical issues arise, however, deserving preliminary examination.  Would such heightened private investment prove sufficient, cost-efficient, and enduring to restore economic growth?  What government policy tensions might this new level of collaboration entail, including potential repercussions for the party itself? Are better alternative approaches realistically available?

The investment gap is genuine.  The country’s business investment in 2022 was still below the level of 2016, contrasting with an average 14% increase across the other G7 economies over the same period.[3]  The UK’s former membership of the EU assisted the development of its strong finance sector, with the City of London providing an English language conduit for American and other companies trading with Europe.  While not the sole cause of UK under-investment, Brexit replaced this advantage with major uncertainties.  The Tory government’s subsequent ‘Edinburgh Reforms’ failed to deliver the further extensive City deregulation advocated by ardent Brexiteers to undercut European financial service standards and restore City competitiveness.  Instead, a watchful EU is developing its own Central Counterparties (CCPs) to rival London’s established clearing houses, simplifying its company listing and capital raising regime and extending EU equivalence in financial service standards internationally.  The City has duly lost financial business and jobs since 2016, while remaining a major international financial centre, with Paris overtaking it as the main European destination for inward investment.  Meanwhile, Brexit’s wider negative impact compounds the UK economy’s older challenges of low productivity, weakened public services and under-regulated markets in a country with an aging population and growing income, regional and health inequalities.

Labour’s new City advisers include prominent figures from the Bank of England, the London Stock Exchange, Yorkshire Building Society, Abrdn, Legal & General Group, Amadeus Capital Partners, Schroeders, Barclays Group, Prudential, and the Financial Conduct Authority.[4]  Their involvement underlines serious City interest in Labour’s intentions.  They recognise Starmer’s understanding of the current trend towards significant state interventions to modernise Western-based industries by promoting green technologies to offset both climate deterioration and Chinese competition.  This is not just about the attractions of a Labour government potentially providing industrial subsidies, loan guarantees or targeted tax incentives to regenerate the UK’s ‘real’ economy.  The party’s repeated promise of a stable ‘decade of renewal’ implies more certainty for business than the chaotic Tory policies of recent times.  Labour is also reviewing City regulations, for example to encourage UK insurance companies and pension funds to invest in British companies through government underwriting of the associated risks.

Another objective lies behind the City warming towards Labour.  As Keir Starmer told the COP28 Conference in Dubai, by requiring financial institutions and listed companies to publish their carbon footprints and detailed transition plans to comply with the Paris Agreement on greenhouse gas emissions, a Labour government would “safeguard and enhance Britain’s reputation as a powerhouse of financial services by grabbing with both hands the responsibility and opportunity that green finance presents.”[5]  The UK releases 1% of global CO2 emissions, but the combined investments of the London finance houses account for 15% of global emissions worldwide.  The City’s losses in business and prestige following Brexit might be overcome through a government-supported focus on the UK as a dominant green finance ‘superpower’, supplementing its recent encouragement of financial technology (Fintech) enterprises.  Nonetheless, any primary reliance on the City to finance the large-scale changes needed to place the UK economy on a viable growth path faces several challenges.

Private finance’s long-term costs

The Blair government resorted widely to private finance, albeit for the different purpose of constructing schools and hospitals under the Private Finance Initiative, to reduce government borrowing and spread costs over longer periods.  This enabled major projects to proceed but triggered parliamentary criticism with the House of Commons Public Accounts Committee noting that “transparency on the full costs and benefits of PFI projects to both the public and private sectors has been obscured by debts and investors hiding behind commercial confidentiality”[6].  The National Audit Office concluded that the associated final costs had been high over the full term of contracts (the cost for one group of schools, for example, was identified as 40% higher than such a project financed by state borrowing)[7] and the Office for Budget Responsibility recorded that the off-balance sheet approach frequently deployed had represented a “fiscal illusion”.[8]  This hard experience suggests that relying mainly on private capital to deliver green industrial transformation in partnership with government and related agencies could ultimately prove considerably more expensive than government borrowing, despite recent high interest rates, to meet the heavy related upfront costs, technical challenges, and longer term rewards.

The City’s overseas interests

While the UK suffers low investment, the country is among the globe’s largest overseas investors.  The 1986 ‘Big Bang’ deregulation of the City under the Thatcher government led to traditional financial corporations diversifying and expanding their activities.  This persuaded many foreign-owned banks to open offices in London, embedding a culture of big bonus payments for successful traders and job insecurity for the rest.  The City subsequently grew rapidly as the world’s largest host jurisdiction for foreign financial interests.  By 2022, the UK was the largest trading marketplace for cross-border credit, foreign exchange transactions and interest-rate derivatives, responsible for between 30-40% of these contracts worldwide.  This openness to international trading has led to today’s UK finance sector now handling some $33 trillion worth of assets, many times larger than the value of the UK’s GDP[9].  The leading British banks are now heavily interlinked to non-bank finance houses and half of their total assets are located offshore.  This high degree of interconnectedness means that shocks and crises elsewhere in the world are swiftly felt in London.  At the same time, profitable market trends emerging abroad are speedily identified and attract international investment arranged by the City.  In 1990, UK pension funds invested over £1 trillion in British companies, but today that figure is below £100 billion as these funds prefer safer government bonds or overseas investments.  The wider UK economy is now also significantly globally linked.  Ten percent of UK listed companies were foreign owned in 1990 but today this figure stands at over 50%.  The resultant trend is for corporate activity within the UK to often focus on the short term and avoid risky innovations, to prioritise profits for overseas shareholders.  Only a quarter of dividend payments now stay in the UK.  This highlights the difficulty that a successful expansion of the City’s financial services internationally may not directly benefit the domestic UK economy as much as a Labour government would expect. There will be stronger incentives to invest in the US and EU, outlined below.

Some City analysts already doubt that Labour in office would risk enough borrowing to incentivise an effective green growth strategy, and likely pre-election Tory tax giveaways may further upset the public finances just as a new government settles in.  Mark Dowding of RBC BlueBay Asset Management has said he would be surprised if the plan ended “at much more than a tenth or at most a quarter” of the original target.[10]  There is also a worrying broader retreat from existing companies’ Environmental Social and Corporate Governance (ESG) investment commitments, apparently due to investor resentment of the associated scrutiny of companies’ sustainability.  It was recently reported that “just six funds citing environment, social and governance factors launched in the second half of 2023, compared with 55 in the first half and an annual average of about 100 between 2020 and 2022”.[11]

US and EU competition

The UK now lacks the state resources to reliably attract sufficient major investors away from the lure of higher subsidies and tax incentives for green industries offered by the US and EU.  The US Inflation Reduction Act provides impressive subsidies for promoting green technologies, alongside other US legislation driving the modernisation of American manufacturing.  As these subsidies are uncapped, Goldman Sachs has estimated they will eventually cost $1.2 trillion over a decade,[12] although the cleaner technologies involved will ultimately provide lower-cost energy as well as lower emissions. 

The EU is reinforcing the individual efforts of member states to implement green growth through initiatives including refocussing its Recovery and Resilience Facility to support green objectives, and introducing a new European Sovereignty Fund to advance such projects uniformly across the Union to implement its European Green Deal and Net Zero Industry plan.  New taxation policies reflect higher carbon pricing, and the European Commission has identified the need to invest €620 billion in the overall green deal and €100 billion annually in promoting green industries.[13] 

Democratic engagement

The US ‘Bidenomics’ model of vast federal government funding for domestic green manufacturing and national infrastructure, and similar emerging EU policies, differ from the major Keynesian economic recovery projects of the mid-20^th century in an important respect.  The US ‘New Deal’ programme and the UK Attlee government welfare state reforms enjoyed the support of strong organised labour and other deep-rooted social movements.  State machinery is clearly better positioned to implement meaningful climate repair measures if it similarly enjoys mobilised popular support.  Recently, however, largely top-down Western government initiatives to limit climate change have initially received public support in principle, given growing understanding of the dangers of climate deterioration, but have faltered at the point of introducing practical changes to traditional sectors and workers’ livelihoods.  Right-wing populists, from US Republicans to European nationalists, have exploited resultant anxieties over job security and compensation levels, claiming climate fears have been exaggerated by a remote self-serving elite.  Today’s trade union movements, less politically powerful than in the 1930s and 40s, have sometimes felt the impact of such arguments within their membership, while recognising the overarching case for urgent climate protection.  This situation requires robust state commitments to effective public engagement in setting climate policies, strong protections for workers directly affected by necessary change, and a persistent focus on the many new jobs and skills which modern green industries offer.  However, UK Labour has not succeeded to date in putting over a popular case for its green prosperity project and has diluted its public commitments.

Repercussions for the Party

Tony Blair once conceded “personally, I think the big defect at the birth of Labour was to be tied to organised labour rather than to be broadly progressive”[14].  Yet the trade unions have consistently provided the party with practical benefits including finance, stability, a continuing activist base and broad social roots, to supplement its Westminster focus.  The most detailed study of party/union relations, covering the entire period from the party’s formation to the late 1980s, demonstrated that union leaders had influenced specific policies but had eventually respected the independent operation of the party in Parliament and government.  Their behaviour across the years was, it concluded “marked by a high level of restraint underpinned by an appreciation of the functional responsibilities of the political leadership”[15].  The party has reaped considerable long-term advantages from its ongoing relationship with organised labour, despite known policy tensions and Tory distortions of its essential nature.  A closer Labour government partnership with the financial sector, however, implies new strains and problems affecting these longstanding links. 

Basic democratic pluralism requires interest groups and social movements independent of the central state but enjoying genuine access to political debate and policy formation.  Strong social roots are even more important for Labour given today’s growing social and political alienation, and nativist populists exploiting social media to spread divisions and prejudices.  A Westminster government heavily relying on powerful City institutions to renew economic growth, however, will encounter fresh policy tensions in return for their support.  The finance sector is not keen on certain improvements to workers’ rights viewed from its perspective as restricting contemporary forms of labour flexibility and will resist measures to introduce greater taxation of wealth and financial assets despite today’s vast wealth disparities.  Describing the party’s revised National Policy Forum programme last summer, the Financial Times noted that “Labour has watered down plans to strengthen workers’ rights as Sir Keir Starmer tries to woo corporate leaders and discredit Tory claims that his Party is ‘anti-business’… Labour may face further showdowns with trade union officials”.[16]  Even the narrowest of today’s ‘pragmatic’ conceptions of social democratic parties confined to minimalised electoral machines must still incorporate national and local grassroots campaigns in election periods and organised labour is a valuable ally in this context.  Efforts by some quarters to dilute official trade union links may nonetheless follow from greater reliance on the City to deliver Labour’s plans, disrupting the party’s future stability.

Alternative approaches

A stronger commitment to government borrowing to fund substantial state support for green industries would be less risky, despite the UK economy’s flaws, if the party were to simultaneously advocate serious negotiations with the EU over the UK re-entering its large-scale single market, even if returning to full EU membership remains a longer-term consideration.  The City and international markets would welcome this positive step towards longer term UK economic stability and Labour could remind the diminishing ranks of unrepentant Brexiteers that the 2016 Leave campaign had itself promised that the benefits of single market membership would be safeguarded.  In addition, the UK cannot ignore the EU’s growing awareness of the need for Europe to collectively prepare for a potential return of Donald Trump to the US presidency triggering a turbulent era of American economic protectionism and collusion with Russia. 

A Labour administration should also recognise widespread public support for reviving the NHS and other public services, as well as growing awareness of dramatic social inequalities across the UK, by raising public expenditure funded by careful but enhanced taxation of substantial wealth as an intrinsic component of an economic growth strategy.  Higher taxation of the types of assets held by the West’s ultra-rich is inevitably moving up the agenda due to yawning social polarisation, with obscene levels of wealth accumulated by a small minority as larger numbers of people sink further into poverty.  ‘Trickle down’ economic policies based on extensive tax cuts have failed to boost overall economic activity.  They have increased stark social inequalities, enabling the rich to invest even more heavily in property and financial assets rather than productive industries.  Lessons to assist the public presentation of such higher tax policies could be borrowed from recent US experience.  Joe Biden’s tax proposals for the 2024 US budget, fiercely resisted by US Republicans, included equalising the tax rate on capital income for millionaires with the rate on wage income and closing tax loopholes for the very rich.  His plans would add nearly $4.7 trillion to taxes on US corporations and high-income individuals, while respecting his earlier “iron clad commitment” not to increase taxes on those earning under $400,000 annually.  As President Trump’s substantial tax cuts increased the US deficit by $2 trillion over a decade without significantly increasing US industrial investment, this year’s presidential election will feature substantial differences between Biden and the Republicans over future taxation, with opinion polls showing large majorities of Americans favouring higher taxes on the very wealthy.

Worldwide state/private sector collaborations

Over many years, philosophers have sought in different ways to combine the erratic dynamism of markets with state planning or cooperative endeavour to reduce social inequalities and insecurities, from J S Mill to G A Cohen. Interestingly, the often independent-minded Bolshevik leader Nikolai Bukharin, later executed on Stalin’s orders, broadly anticipated a potentially lengthy era of close collaboration between central states and private capital, rather than the full transition from capitalist to socialist economic systems widely predicted in his time due to mounting global crises.  He saw ruling elites as “more tolerant regarding monopolist interference of the state power.  The basic reason for this change is the ever-growing closeness between state power and the leading spheres of finance capital … a maximum of centralisation and a maximum of state power are required by the fierce competitive struggle on the world market … capitalism has attempted to overcome its own anarchy by pressing it into the iron ring of state organisation.”[17]

Today, the principal Western economies are indeed reinforcing the economic role of governments, to meet the challenges of international superpower competition, climate degradation and feeble global economic growth since the 2008 financial crisis.  Elsewhere, different varieties of strong state/private sector collaboration have flourished in China, South Korea, Singapore, and beyond, now also adjusting to a problematic international context following earlier rapid growth.  These emerging models of constrained market forces pose serious questions about forms of democratic engagement and involvement in shaping this increased state direction and underline the urgency of strengthening international cooperation, through reinforced global institutions, to avert fresh confrontations. 

In the UK, practical concerns over the corporate financing of green growth should be added to the known challenges to successfully advancing this key agenda.  Persistent Tory underfunding of public services means that pressures to restore their funding will grow as hopes of an end to austerity rise under a new Labour government, just as resources are needed to initiate this central growth project.  The crucial question of what government tools will be available and effective in promoting this agenda, hopefully drawing on experience in the US and beyond, also requires debate.  Much will depend on Labour positively building popular support for this programme as these issues loom.  Awareness of ongoing environmental damage is spreading, alongside current serious concerns over a weak and uneven national economy.  This overdue drive for a greener economy should be clearly explained and actively promoted as Labour approaches the general election, to at last offer real hope of a cleaner and secure future.

Notes

[1] Keir Starmer Speech to Resolution Foundation, Labour List” 4 December 2023

[2] A Learmonth “Jim Murphy praises Keir Starmer business links” in The Herald 21 September 2023

[3] UK Team, IMF European Department “United Kingdom’s Long-Run Prosperity Hinges on Ambitious Reforms” in IMF Country Focus, 11 July 2023

[4] Charlie Conchie “Labour no longer ‘sneering’ at business as it calls in City grandees” in City AM 8 December 2023

[5] “Labour will boost investment in Britain by making the UK the green finance capital of the world” says Starmer, as he meets major global investors at COP 28 in Dubai” in Policy Mogul, 30 November 2023

[6] “Lessons from PFI and other projects” House of Commons Public Accounts Committee Report, July 2011

[7] “Value for Money: PF1 and PF2” National Audit Office Report, 18 January 2018

[8] “Fiscal Risks Report”Office for Budget Responsibility, July 2017

[9] “Assets of all financial institutions in the UK 2002-2022” in Statista Research Department, 3 January 2024

[10] J Pickard, G Parker, M MacDougall, L Fisher “What is Labour’s £28 million green investment plan and will it survive until polling day?” Financial Times, 10 January 2024.

[11] W Schmitt “Fund houses rein in ESG offerings as scrutiny of sustainability labels rises” Financial Times, 10 January 2024

[12] “The Real Cost of the Inflation Reduction Act Subsidies: $1.2 Trillion” Editorial in Wall Street Journal, 24 March 2023

[13] J Ainger & A Nordelli “EU needs to invest an extra €700 billion a year for green shift” Bloomberg News Daily, 4 July 2023

[14] J Rentoul “Is Keir Starmer in the pocket of the trade unions – and do voters care?” The Independent 20 January 2023

[15] Louis Minkin The Contentious Alliance Edinburgh University Press, 1991

[16] L Fisher, M O’Dwyer, J Pickard “Labour rows back on workers’ rights to blunt Tory ‘anti-business’ claims” Financial Times, 17 August 2023

[17] Nikolai Bukharin Imperialism and World Economy, International Publishers, New York, 1929