The Bank of England could be given a mandate to boost productivity growth under a Labour government as part of opposition plans to overhaul the country’s “economic architecture”.
Revealing the findings from a review of the UK financial system, the shadow chancellor, John McDonnell, will on Wednesday make the case for a fundamental transformation that could include a revamp of the Bank’s remit in order to help drive economic growth.
Referring to the need for greater productivity across the economy, McDonnell will say: “Our financial system right now isn’t fit for this purpose. We need one that helps to deliver enough investment in the high-technology industries and firms so that we can reboot and rebuild Britain. This report is a vital part in making this happen.”
Under options being considered by the party before the next election, Threadneedle Street would cooperate with the government on meeting a productivity target, move some of its operations to Birmingham, and steer high street banks towards lending in productive sectors, such as manufacturing and IT.
The proposals come amid a slowdown in business investment across the UK in the wake of the Brexit referendum. This threatens to further exacerbate the weak recovery of growth in productivity – economic output per hour worked – since the financial crisis of 2008. Productivity is considered important because if workers produce more in a shorter space of time, it paves the way for pay increases and a rise in wealth.
Experts believe the failure to return productivity growth to its pre-crisis trend rate of about 2% is among the biggest factors holding back wage growth. The Office for Budget Responsibility forecasts that productivity growth, which was 0.6% last year, will only hit 1.2% by 2022.
The report, compiled by the economist Graham Turner, of the consultancy GFC Economics, argues that too much high-street bank lending flows into “fundamentally speculative activities” rather than productive investment, making the situation worse.
McDonnell will point to investment in new technologybeing concentrated in London and the south-east, and to Britain’s position of having the lowest rate of investment in the G7. He will say the policies of the Conservatives have led to real wages being lower now than they were in 2010, with the UK having gone through the slowest decade of productivity growth since the Napoleonic wars ended in the early 19th century.
“We’ve seen more and more investment flowing into property speculation whilst hi-tech firms have been starved of the money they need, and research spending has lagged far behind,” he will say.
If Labour adopted the recommendations, they would represent the most radical shake-up of the party’s economic policy since Gordon Brown handed control of interest rates to the Bank two decades ago. Under the plans, it would retain this remit for setting interest rates in order to steer a course for inflation towards 2%, while maintaining independence. Labour has yet to confirm whether the Bank’s rate-setting monetary policy committee would have responsibility for meeting the productivity target.
However, the measures could raise eyebrows among some economists, with steps for boosting productivity typically reserved for the Treasury, which is controlled by elected officials rather than senior Bank staff. There could also be questions about the best way to measure productivity, with economists debating whether the weak progress of the past decade has been overstated.
Other measures suggested by the Turner review include some put forward by Labour previously, including moving parts of the Bank to Birmingham, as well as the government retaining a stake in Royal Bank of Scotland in order to boost lending to small businesses.
Labour would also establish a strategic investment board to deliver productive investment, and a national investment bank to focus on lending to regions outside London.