FinancialisationThe Growth of British Economic Inequality
Thatcher’s ‘Big Bang’ fundamentally restructured the UK economy – bidding up asset prices and pushing down wages and living standards, writes Thomas Perrett
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According to a recent Trades Union Congress report, bankers’ bonuses have risen twice as fast as real wages since the 2008 financial crisis. The report, which accused the Government of “holding down” key workers’ wages, found that City workers’ bonuses had increased by 101% in cash terms between 2008 and 2022, and that bonuses in the financial and insurance sectors had reached £20,000 per year – almost 150% of teaching assistants’ average pay.
A cap on bankers’ bonuses, implemented following the 2008 crash, had attempted to roll-back the association between CEOs’ pay and their performance – removing incentives to take risks with short-term, speculative investments. Last month, Chancellor Jeremy Hunt told Parliament that “the mechanism with the cap wasn’t working”, with the Government pressing ahead with plans to remove it.
The link between bankers’ pay and their performance first emerged as part of policies introduced by Margaret Thatcher, known as the ‘Big Bang’ through which she deregulated the financial sector in 1986.
Since then, financialisation has stymied productive investment, encouraged the growth of asset bubbles, and significantly increased levels of household debt – emerging as a major contributing factor to Britain’s current economic malaise.
Declining Productive Investment
Former Prime Minister Liz Truss argued that her ideological opponents – including opposition parties, NGOs and trade union leaders – belonged to an “anti-growth coalition”. In fact, decades of financial deregulation pursued by primarily Conservative governments has intensified economic stagnation.
The manufacturing industry, for instance, which comprised 28.4% of GDP in 1971, comprised just 23.1% by 1984.
Thatcher’s Big Bang gradually cut away at the productive base of the economy, as according to Confederation of British Industry figures from the period 1980 to 1990, investment per employee in Britain stood at £1,980, compared to £2,850 in Germany, £3,300 in France, and £5,360 in Italy.
During the same period, financial services came to dominate the British economy.
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The banking sector’s share of GDP rose from 9.3% in 1971 to 18.7% by 1989. There was a widening trade deficit, combined with policies aimed at reducing inflation and extinguishing the power of the unions. By 2016, Britain ranked 116th out of 141 countries for capital investment as a percentage of GDP.
The financial sector has consistently allocated resources towards profitable corporate monopolies – rather than new, productive avenues of the economy.
A report by Finance UK has shown that, while credit creation to buy existing assets increased by £6 billion between Q2 of 2020 and Q1 of 2022, gross lending to small and medium-sized businesses declined by £1.2 billion between Q1 of 2019 and the Q1 of 2022. This has arguably culminated in stagnating wages, which have been increasingly decoupled from productivity since 1981, as firms scramble to cut costs to pay back loans.
Indeed, financialisation has had a notably deleterious effect on the productivity of labour. According to the International Labour Organisation, hourly labour costs in Britain were the equivalent of $30, lower than most European countries. Productivity in Britain today is estimated to be 20% lower than in France and Germany, and 30% lower than in the US.
Exacerbating an Inflationary Crisis
Britain’s exposure to supply-side shocks, such as the impact of the war in Ukraine on energy prices and rising import costs following the recent devaluation of the pound, is an enduring legacy of Thatcher’s Big Bang.
Excessive levels of speculative investment, which has compelled business to engage in ruthless asset-stripping and wage reduction to remain competitive – and has boosted the country’s reliance on imports – culminated in a trade deficit of £92 billion by 2018.
As the cost of living crisis bites, British workers continue to suffer from a long squeeze in wages, falling behind their counterparts in other European countries.
According to research from think tank The Resolution Foundation, the average British household is now £8,800 poorer than its equivalent in France, Germany, the Netherlands, Australia and Canada. The report blamed the “toxic combination” of low productivity and a persistent failure to narrow the divide between rich and poor for the conditions of British workers.
The report criticised the failed policies pursued by successive Conservative governments, recognising that a positive growth strategy would involve a significant increase in productive investment, which has stalled since 2008. UK business investment is currently 9.1% lower than it was prior to the pandemic.
Indeed, Simon Youel, head of policy and advocacy at think tank Positive Money, blames the “chronic dependency” on imports which financialisation had encouraged.
He told Byline Times that “the financialisation of the British economy has seen industry sacrificed in favour of the City of London and an overvalued currency”, arguing that Britain had become “particularly vulnerable to inflation driven by international supply shocks like we are currently seeing”.
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The Housing Question
The expansion of cheap credit, intended to boost demand in the face of stagnating productivity and falling wages, has long been a centrepiece in the financialisation of Britain’s economy.
Household debt, which had comprised 55% of GDP by 1987, skyrocketed to 105% of GDP, or £1.4 trillion, by 2009. Indeed, Thatcher’s decision to allow commercial banks to lend to mortgage holders, when previously only building societies – controlled by their members – could lend to prospective home-owners, created a flood of speculative investment which drove up house prices.
Today, average house prices in Britain are nine times the average income across England and Wales, and 20 times the average income in London and the south-east.
As a result, Britain’s wider economic performance has become tied to the buoyancy of a volatile housing market – with mortgages an important source of new investment.
Domestic mortgage lending now comprises 60% of GDP, as households take out ever larger mortgages to get on the housing ladder. At times of low growth and stagnating demand, new money is persistently allocated to land and property.
Following the 2008 financial crash, a programme of Quantitative Easing (QE) – intended to stimulate an economic recovery – merely increased house prices by a further 25%. According to analysis by the Bank of England, real house prices in 2014 would have been 25% lower than they actually were had the first round of QE not been implemented in 2009.
According to a report by the New Economics Foundation think tank, “the growing preference for mortgage lending comes at the cost of funds for the productive economy – loans for business expansion, infrastructure and the job creation that comes alongside it”.
“In aiding the creation of an economy that runs off mortgage debt rather than through boosting spending power via increases in wages, productivity and trade, we’ve become entrenched in a housing affordability crisis with a great human cost,” it added.
Simon Youel told Byline Times that “since the large-scale deregulation of the financial sector in the 1970s and 1980s investment has shifted away from productive income-raising activity and towards bidding up the price of existing assets, which has provided little benefit to workers”.
“The explosion of credit since the 1980s has also enabled falling wage growth by allowing workers to substitute with borrowing,” he said.
The growth in financial services has precluded the implementation of a genuinely productive growth strategy.
Britain has, for decades, lagged behind on investment in renewable energy and home insulation, as energy bills are currently £2.5 billion more expensive than they might have been had a programme of spending cuts to climate infrastructure not been implemented back in 2013. Mobilising the investment necessary to revive demand and stimulate the productive economy may require a thorough reappraisal of the purpose and direction of the financial sector.
The deregulation of finance has fundamentally restructured the British economy, bidding up asset prices and pushing down wages and living standards, as businesses are forced to repay loans to banks seeking short-term profits. By refusing to scrap the cap on bankers’ bonuses, this Government has shown that it is unwilling to reverse this decades-long abandonment of productive growth and investment.