At the time of writing, Britain is the only G20 country still in recession but finally, after two years in decline, there is hope that our economy is finally growing again.
It is widely anticipated that the Office for National Statistics will tomorrow announce that the most prolonged recession to hit the UK since records began in 1955 is now officially over.
However, any recovery is by no means built on solid foundations – one of the driving forces behind the anticipated growth will undoubtedly have been the Bank of England’s unprecedented injection of capital into the marketplace. We will only know if this renewed market optimism is justified when fiscal and monetary policy returns to normal and the programme of Quantitative Easing – which is not only unsustainable but has also resulted in a record level of government debt – comes to an end.
We will continue to face strong headwinds for the next two to three years as it is by no means certain that the economy can grow strongly enough to offset the negative effects of likely public expenditure (i.e. jobs) cuts, tax rises and restricted credit.
It is against this background that we should all be increasingly concerned about the impact that the political backlash against the banks could have on wider UK society.
Credit and liquidity are the lubricants of any advanced economy. We all agree that the excesses of the past need to be wrung out of the system but we are in danger of going much further than that.
We need to remember that banks are the main conduit of this elixir of economic life.
The cumulative effect of current and future tax and regulatory proposals could, if implemented, lead to a dramatic slowing in credit supply as banks build up their balance sheet reserves thus limiting credit availability from mortgages to commercial lending and causing interest rates to rise as credit outstrips supply.
We may very well live to regret using the financial services industry as a political football. Whilst punishing the financial services industry may seem like a win-win situation for politicians, pursuing such a policy has serious implications not only for the City but for the whole of the UK.
Recent events in the US are a case in point – President Obama’s latest proposals are regrettable because they are not based on any kind of global consensus – instead, they go against the thrust of European and G20 thinking on global regulation. Banks will inevitably become more cautious if they cannot be sure of what taxes they will be expected to pay, what capital buffers they will need to build and what businesses they will be allowed to invest in. Politicians across the globe must make sure that regulatory proposals are underpinned not by political points scoring but by a rational debate on how to achieve long-term economic stability.
With the UK elections looming and the US mid-terms in November, removing politics from the equation may well be difficult but it must be done.
Stuart Fraser is chairman of the City of London’s policy and resources committee.