ALEX BRUMMER: Rachel Reeves to scrap former chancellor’s rules

The Labor Party has an arduous task in fulfilling its mission of growth. The bible of ‘Mission Economics’ was written by University College London professor Mariana Mazzucato.

It was modeled on John F. Kennedy’s race to the moon amid fears that the former Soviet Union’s Sputnik program was winning in space.

In the end, the United States triumphed by incorporating the mission into all relevant parts of the government, from the Treasury to the Pentagon to university research programs. Growth is a much more nebulous concept and in the past has left many government efforts mired in the treacle of bureaucracy.

Harold Wilson’s 1960s vision of an economy driven by the “white heat of technology” ended in failure. The Treasury Department swallowed up a newly created Department of Economic Affairs. British Leyland effectively scuttled the ambitions of the National Enterprise Board.

There has been a perpetual struggle between the UK’s vulnerability in global markets and efforts to boost production.

Wilson was defeated by a trade deficit and a run on the pound. George Osborne’s austerity was the result of the great financial crisis of 2008. Liz Truss’s enthusiasm for the supply side was crushed in the government debt market. Rachel Reeves’s bleak narrative arises from concerns that the new Labor government could be crushed by debt and borrowing.

Much of what Reeves has done, or is planning so far, works against growth. Policies such as closing loopholes in North Sea oil exploration, threats of increases in capital gains, inheritance and pension taxes work against effort and entrepreneurship. However, the Chancellor is not entirely immune to pressure, as her willingness to dilute plans to close non-domiciled loopholes suggests.

Similarly, she and the Treasury are keen to change fiscal rules, which guide budget policy, to create as much room as possible for investment.

For the growth mission to have any real chance of getting off the ground, the Chancellor will need buy-in from the City and asset managers.

Both former chancellor Jeremy Hunt and now Reeves are striving to free up cash from pension funds to invest in startups, infrastructure, green energy and equity investments. The fall in pension fund investment in UK shares to less than 3% by some measures is often attributed to Gordon Brown’s removal of the tax relief received on dividends.

There is also a think tank in Square Mile and Whitehall, who now think that the City’s post-financial crisis regulatory reform by Osborne has played an important role in the suppression of animal spirits.

Following supervisory laxity from the Financial Services Authority (FSA) and the Bank of England in the run-up to the banking implosion, which began with Northern Rock in 2007, City regulation was turned upside down. It moved from its traditional principle-based regime, which offered flexibility, to a cumbersome rules-based system.

Banks, insurers and pension funds were forced or required to hold large amounts of capital, much of it tied up in government bonds. The separation of “casino” style investment banking from commercial and consumer banking led to most major banks becoming risk averse and abandoning trading and brokerage activities. Only Barclays, with the help of enthusiastic former chief executive Bob Diamond, maintained the riskier mandate.

The poorly functioning FSA was replaced by the Financial Conduct Authority, which has created layers of increasingly complex rules. Even the simplest tasks, like getting approval for lowly executives to be approved people, became stubbornly bureaucratic. The hopelessly intrusive rules and disclosure requirements governing the listing of companies on the London Stock Exchange sent many promising new and established companies to New York and Amsterdam. The only areas that flourished were wholesale markets, such as foreign exchange and derivatives. They are so big, established and powerful that they were effectively uncontrollable.

The ultimate irony would be to see a Labor government throw into the sea the rules-based system established by the Conservative-dominated coalition. Under Nikhil Rathi, the FCA has quickly sought to simplify the application of the law and make listings easier. Reeves is set to formally remind the FCA and the Bank of England’s rigid Prudential Regulatory Authority of the “growth” mission at budget time. Lighter touch regulation is making a comeback.