As the UK faces persistently weak growth and limited fiscal flexibility, this article explores whether banking regulation is acting as a structural brake on economic expansion. Post-crisis reforms have strengthened financial stability but may have uninten
As the UK wrestles with weak growth and
limited fiscal flexibility, the real constraint may not be geopolitics but
regulation.
Post-crisis banking reforms have reshaped
balance sheets away from business lending, starving SMEs of capital and quietly
suppressing the country’s long-term productivity and economic potential.
So, is the UK alone? And would it be better
off economically as part of a larger grouping by cleaving to either the EU or
the U.S.?
This is widely seen as a key choice the UK
now needs to make, but the underlying economic problem the UK faces is low
growth, leaving little room to maneuver financially.
In practice, it cannot increase borrowing
as its debt-to-GDP ratio is close to 100%, and unless the economy grows this
represents a significant constraint on future borrowing.
More government spending can therefore only
come from higher taxation. If you don’t want to be in the thrall of the bond
market, stop borrowing from it.
But would aligning with either the EU or
the U.S. improve growth potential? Even if this were a realistic choice, there
is little reason to believe it would.
The UK economy is predominantly
service-based, and the EU has yet to create a single market in services.
While manufacturing and agriculture might
benefit, energy costs would remain a major problem and are unlikely to be
solved by EU membership. Overall, joining the single market or the EU as a
whole would not be revolutionary.
The U.S. presents an even less appealing
prospect. What kind of accommodation might be offered, and how long it would
last, is anyone’s guess.
One aspect of greater EU integration that
rarely gets mentioned is membership in the single currency area.
The European Central Bank has been more
successful at curbing inflation than the Bank of England, resulting in lower
interest rates. How to sell this to the UK public would be a considerable
political challenge.
Should we, then, conclude the UK is in
managed decline? I think not.
One aspect of the UK’s current challenges,
recognized across the political spectrum, is overregulation. This is visible in
major projects such as HS2 and Hinkley Point C, both significantly over budget
and delayed.
Yet the more important issue is excessive
regulation within the banking industry, which is having a greater impact on
growth.
