September 7, 2022
Liz Truss has been confirmed as the new Prime Minister, with key cabinet appointments including Kwasi Kwarteng, Jacob Rees-Mogg and Graham Stuart. What does this mean for the movement to create a fair, democratic and sustainable financial system? Read on for 3 major battlegrounds to watch this autumn.
1. Bank of England independence
Truss and her leadership opponent Rishi Sunak butted heads several times during the contest over the issue of central bank independence. Truss has repeatedly pointed blame at Bank of England governor Andrew Bailey for failing to get inflation under control, even accusing him of fuelling it through the injections of new money (known as Quantitative Easing) that helped support the economy during the pandemic.
These claims have been widely discredited, including by Bailey himself, not least because they distract from the much more pressing sources of inflation that the Bank of England has no control over, such as fossil fuel-driven energy price shocks, speculation on essential goods like food, and supply chain disruptions. After facing criticism from Sunak and Bailey over her suggestion of a Bank mandate review, Truss appeared to soften her stance over the weekend, saying she’s a “great believer” in central bank independence.
Kwasi Kwarteng, who has been confirmed as Truss’ Chancellor, also hinted at a mandate review in August. But, he assured readers of the Financial Times this week, and business leaders this morning, that he is committed to independence. Neither has given details on any specific changes, but some have speculated that tweaks to the inflation target or new instructions to promote growth could be on the table.
At Positive Money, we think that the central bank mandates shouldn’t be untouchable – it’s right that they’re periodically reviewed to make sure they’re fit for meeting the challenges of the day. That’s why we successfully campaigned for Sunak to add a green objective to the Bank’s key decision-making committees in 2021. It’s also why we’re calling for the Bank to play its part in tackling the housing affordability crisis, by keeping house prices low and stable. But reducing the money supply in a blanket way (rather than targeting money created solely to boost financial markets, house prices or other speculative activities) would be the wrong way to tackle inflation at a time when we need to see more green, productive investment to keep the economy going.
2. A Net Zero financial centre
After several weeks of deafening silence on climate from all leadership contenders, Truss has confirmed that she remains committed to the government’s legally binding goal of reaching net zero emissions by 2050, but is sceptical of some of the key policies we need to get there, such as government subsidies for green energy. She told the Times that she plans to open a round of new oil and gas licensing as Prime Minister, despite a clear international consensus that fossil fuel expansion must stop this year. Although by no means a ‘green’ advocate, immediate pressure to relieve the energy bill crisis and secure our energy supplies in the face of ongoing Russian aggression in Ukraine may tip Truss in favour of climate action.
Truss will also be closely influenced by Kwarteng, who has generally been seen as a greener voice in the Conservative Party, proposing an energy efficiency scheme that was blocked by Sunak, and delivering the UK’s new Energy Security Strategy back in April. The Strategy was generally considered a step forward on renewables, although it also contained provisions for further dangerous extraction of North Sea oil and gas. He has paid lip service to the need for a greener financial system, arguing for the government to play a role in creating a “virtuous cycle” for green investment, creating investor confidence through a robust regulatory framework.
Kwarteng’s support for renewables will soon come up against the anti-climate zeal of Jacob Rees-Mogg, now confirmed as Business Secretary, who famously wants to squeeze “every last cubic inch of gas” out of the North Sea. In 2014, he got in trouble for supporting oil and gas without declaring financial interests in the fossil fuel industry.
Other key green appointments include Graham Stuart as Minister for Climate, who has described himself as a “deficit hawk” and recently voted against key proposals to green pension funds and financial regulators. He has mixed positions on fracking, subsidies and green taxation. Longer ago in 2012, he supported the establishment of a new Green Investment Bank (which was then controversially sold off to Australian bank Macquarie) but voted against mandating it to support the UK’s carbon emissions reduction target. Ranil Jayawardena, the new Environment Secretary, is a former manager at Lloyds Banking Group – the latest in a long line of Conservative ministers with deep ties to big finance. Alok Sharma will stay on as the figurehead for COP26, seeing the UK through its final months of COP presidency before the 27th summit in Egypt.
As a pair, Truss and Kwarteng are much less wedded to immediate deficit reduction than Sunak, and will soon announce measures to help households with bills over the winter – including an expected energy bill freeze of maximum £2500 a year for households until the 2024 general election. The challenge will be to convince them that public investment should be channelled towards green energy and home insulation – not wasted with tax cuts for the rich or handouts to big business in a blind attempt to boost GDP.
Before the political upheaval began, Kwarteng’s former department for Business, Energy and Industrial Strategy (BEIS) was set to publish a Green Finance Strategy this autumn. This strategy could be a gamechanger, filling a crucial gap in the UK’s climate plan: how to get public and private money flowing to the right places to deliver the government’s Net Zero Strategy. As Chancellor during the COP26 climate summit last year, Sunak had set out an ambition to make London the world’s first ‘Net Zero Financial Centre’, but was slow on enacting the decisive policy changes we need.
In June, we helped coordinate a joint statement to Kwarteng calling for the Green Finance Strategy to include bold action, including strong tools to actively shift finance away from fossil fuels and much higher levels of public investment in green alternatives. It’s critical that we don’t see significant delays to this much-needed strategy under the new BEIS Minister, Jacob Rees-Mogg.
3. Post-Brexit financial rules
Another Sunak legacy that the Truss administration will inherit is a major shake-up of the rules governing our financial system, known as the Future Regulatory Framework Review. In the wake of Brexit, there are big decisions to be made about whether the UK will diverge from key aspects of the European regulatory regime.
This has opened up a wider debate about the purpose of financial regulation, with Sunak’s Treasury proposing to give regulators a new objective to promote the “growth and competitiveness” of the financial sector. There are widespread fears that these reforms set the grounds for deregulation that could weaken social and environmental protections and reinstate the light-touch regime that led to the 2008 financial crisis. That’s why we, alongside the Finance Innovation Lab and other civil society organisations, have been campaigning to oppose them. Economists, regulators, and politicians, including a powerful committee of MPs scrutinising the Treasury, have all raised concerns over aspects of these proposals, and polling has shown they are deeply unpopular amongst the general public.
The next iteration of the shake-up – the Financial Services and Markets Bill – is moving through Parliament with a Second Reading on Thursday this week. It’s not clear what Truss makes of the Bill in its current form, but her July commitment to “accelerating our regulatory divergence from the European Union” doesn’t bode well if it spells a wave of deregulation. Rees-Mogg, too, has a history of blaming “EU regulations” for all manner of ills, including the slow pace of shale gas exploration, and may seek to accelerate the ripping up of rules in his new Business post.
Powerful City lobby groups have already spotted an opportunity and started vying for tax breaks – the last thing we need after banks recorded eye-watering profits in 2021. We will be watching closely and campaigning for amendments to the Bill that replace any ‘competitiveness’ objective with measures to prioritise the climate crisis, financial inclusion, and proper accountability, so that the public and civil society have as big a say in how the financial sector works as industry lobbyists.
There’s lots to do in the fight for a fairer, greener financial system. If you haven’t already, sign up for updates this autumn to find out how you can get involved.
Anna Pick is Senior Policy Officer at Positive Money. She tweets at @Annapick_
Image: Prime Minister Liz Truss Arrives in Downing Street © Simon Dawson. Licence: CC BY-NC-ND 2.0.