Growing finance sector may harm government missions, experts warn

London, 16 December 2024 - 50 economists and civil society leaders have written to the Treasury warning that its drive to grow Britain’s financial sector risks undermining the government’s missions and the wider industrial strategy, in a statement co-ordinated by research and campaign group Positive Money.

In the joint response to the call for evidence for the government’s new Financial Services Growth and Competitiveness Strategy, experts point to a wealth of empirical evidence showing that when the financial sector grows too large it harms economic growth. The signatories therefore urge the government to rethink its focus on increasing the growth and competitiveness of the financial sector as an end in itself, and instead ensure that the sector is well-regulated and able to meet the needs of the wider economy.

Positive Money analysis of the most recent Bank of England data illustrates how the UK’s financial sector is failing the real economy, with lending to productive industries being in negative territory for the past three years, falling by £8.5bn last year alone.

Signatories to the joint response include Sir John Kay, who led the Kay review of UK equity markets and long-term decision making for the UK government, former FCA board member Mick McAteer, and economics Nobel laureate Joseph Stiglitz.

Simon Youel, head of policy & advocacy at Positive Money said, 

“If the government wants to make regional economic growth its central mission, the evidence suggests that the last thing it should be doing is further inflating the size of the City of London.

“The growth of financial services typically does not represent the creation of new economic value, but rather the zero-sum extraction of wealth created elsewhere in the economy, not to mention the drain of some of the country’s brightest brains for activities with little social value. History has shown time and time again that beyond a certain point, the financial sector can only continue to grow by taking excessive risks and increasing the economy’s debt burden until the inevitable collapse.

“You would think Ministers shouldn’t need reminding that it was an oversized and lightly-regulated financial sector that brought the downfall of the last Labour government. The government should instead focus on the opportunity to raise the UK’s dismal productivity and living standards by ensuring that finance serves the real economy.”

Notes

• The letter can be read in full here: https://www.datocms-assets.com/132494/1734021836-financial-services-growth-and-competitiveness-joint-response-1.pdf 

• The call for evidence for the Financial Services Growth and Competitiveness Strategy can be found here: https://www.gov.uk/government/calls-for-evidence/financial-services-growth-and-competitiveness-strategy  

• Further information on Positive Money’s analysis of lending data: https://positivemoney.org/press-release/new-bank-lending-figures-undermine-chancellor-s-praise-for-the-city/

About Positive Money

Positive Money is an international research and campaign organisation working to redesign our economic system for social justice and a liveable planet. Set up in the aftermath of the financial crisis, Positive Money is a not-for-profit company funded by charitable trusts and foundations, as well as small donations from its network of supporters. Find out more: www.positivemoney.org