Karel Williams: The North must remake itself politically to create a sustainable financial future

FINANCIAL reform has now become a democratic issue outside Westminster because many, especially the young, are angry with mainstream parties which have not effectively reformed banking and have socialised the losses of finance so our future is low growth, no jobs and cuts in public services.

It began with the indignant camping out in Madrid, reached New York with Occupy Wall Street and now comes to London with tents pitched outside St Paul’s Cathedral in the heart of the City.

But financial reform should also be a regional issue for everybody living in the North and West of Britain. Forty years ago, Yorkshire and Lancashire were industrial provinces with independent elites, voice and organisation through public company headquarters, regional media and mass parties.

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Now they are non-regions, without institutions and resources, as clients of a London-centred state which is increasingly unwilling to fund high levels of welfare dependence and to pay for most of the new job creation as New Labour did before 2007.

The nature of the UK’s regional problem has changed since financial de-regulation in the 1980s. The City of London reinvented itself as an offshore international financial centre on the banks of the Thames.

As we argue in our new CRESC book, the huge costs of this offshore centre are passed over and the benefits are talked up by the lobbyists for a finance sector which now safeguards its position by paying for Westminster politics. By 2010, more than half of cash donations to the Conservative Party came from the financial services sector, mainly from rich individuals.

Here are some uncomfortable facts which finance lobbyists and Westminster politicians won’t tell you and which should make you angry.

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A large financial sector in London concentrates prosperity and activity around a few football-stadiums-full of the working rich in terms of direct and onward employment. As the sector is built on tax avoidance, it does not then create a large transfer fund that pays for welfare and services in the ex-industrial regions. In the boom years from 2002-08, the finance sector provided less than seven per cent of government tax receipts. Manufacturing paid nearly twice as much.

A large financial sector in London creates massive liabilities which burden the whole economy and drive a pro-London policy mix of loose monetary and tight fiscal policy.

Finance’s contribution to the balance of payments is offset by the risks and liabilities arising from a bloated sector which has assets equal to five times GDP connected by long chains to every other problem in the world’s financial system.

The disadvantage of the regions is then reinforced under current government policies. The Bank of England has cut interest rates towards zero and printed money through quantitative easing which keeps the financial markets going; while the Chancellor imposes public expenditure cuts which have already produced the largest-ever quarterly fall in public employment.

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The continued success of London as a financial centre depends on infrastructural investment and so London takes the lion’s share of public and private spending on infrastructure.

The Channel Tunnel Rail Link, Heathrow T5, Crossrail, the Olympics, London Gateway Port, the District and Circle upgrade and the East London line, on the back of my envelope, cost £50bn. And the loosening of planning regulations by the coalition will create a building boom around London where each new house requires at least £50,000 of new infrastructure.

Meanwhile, any reform of banking by politicians must be acceptable to the banking sector. Hence all party support for the Vickers Commission proposals to increase the stability and competitiveness of banking through selling off a few branches, adding a bit more capital and “ring fencing” retail, all in a form that does not upset the banks.

Vickers completely ignores the connection between finance and widening regional inequalities which mean Yorkshire value added per capita has slipped to less than half that of London. To which the coalition response is local economic partnerships, enterprise zones (again) and High Speed Two (HS2) which supplements the two main lines with one high speed train link (if Southern NIMBYism allows).

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Should the citizens of Huddersfield or Leeds camp out and hang “London shafts Yorkshire” banners down the front of their great Victorian town halls? That would be a useful performance if it marked the end of regional illusions about what London-dominated parties will do for them.

But we need then to learn from the Scots agenda for regional governance which creates institutions and claims resources. Yorkshire and the North East must reinvent themselves politically before they can claim a sustainable economic future.