The Economics of Recovery

All of Andy Burnham’s instincts about putting the public sector at the centre of and recovery (and democratic renewal) strategy are spot on. The key questions are about how to make this deliverable.

Everything hinges around the question of access to capital, or at least the separation of long-term investment instincts and short-term speculative ones. It also hinges on a bigger threat to the whole democratic system that comes from oligarchs in the crypto and AI sectors. This is what the Bank of England (and the Treasury) must be forced to address.

What follows is a short outline of some of the political challenges ahead.

• Corporate monarchies – The next big challenge is already coming from AI and crypto oligarchs. Some are already setting up their own micro-countries, with zero taxation and voting rights entirely dependant on wealth. (See – https://www.bbc.co.uk/news/articles/ cly8eqyj8e2o). This will become a direct threat to democracy itself.

Both the Treasury and the Bank of England have to be pushed into a radical rethink of how to unpick the elaborate tax avoidance mechanisms used by today’s corporate feudalists. In reality, this is probably best done in conjunction with European allies. Unless this is tackled, however, democracies will be increasingly undermined by feudal autocracies.

• Many of the UK’s problems also stem from over-exposure to the demands of short-term, leveraged, private equity finance. These are quite different interests from those of insurance companies and pension schemes that (at least in theory) have longer term perspectives that they work to. These funds now hold large parts of the public sector to ransom – from the education of Special Needs children to the care of vulnerable elderly, from our Water companies to the running of our railways, and from Academy schools to the housing of refugees. (Hettie O’Brien’s book ‘The Assett Class’ sets out in detail how this was done.)

One key to cutting the welfare bill is in returning public services to the not-for-profit public sector. This has to be done by redefining the role of the Treasury and the Bank of England. It will be Labour’s biggest challenge. How do you create the basis for long-term, low-interest capital funding? Europe may offer some useful answers.

• KfW in Germany. The German government set up the KfW Development Bank in 1948 to underpin its approach to both development work and, subsequently, its domestic shift into renewables. The bank is 80% owned by the German Federal Government and 20% by the German federal states. KfW fulfils a steering role at state level. KfW finances its promotional funds primarily by borrowing on the capital markets, benefiting from high creditworthiness to secure favourable terms. The UK could copy this model but also give it a capital base of its own, allowing low-interest (1%-2%) loans to underpin public sector renewal strategies.

In addition, the KfW underwrites 50% of the risk associated with the investment funding it offers. This also lowers the cost of other capital investment coming into their schemes, and puts a premium on new public-public partnerships.

Bank Reserve interest rates. In their fight against inflation, central banks raised interest rates dramatically post-2021. They implemented rate hikes by raising the rates of remuneration on bank reserves. These are highly liquid and risk-free deposits that banks hold at their respective central banks. As a result of the large purchases of government bonds since 2015, bank reserves are now very large. This has created a situation in which the fight against inflation has led to record high interest payments by the central banks to banks. But…

UK interest payments are particularly high. The Bank of England currently transfers £40 billion a year to the banks rather than to the Treasury. This seems perverse when the UK government faces a budget deficit of £120 billion and calls for large spending cuts. Reversing this would make a huge difference and would also be a return to former Bank of England orthodox practice.

• Follow European examples on reserve requirements. The ECB applies a minimum reserve requirement of 1%, which is not remunerated. Switzerland goes further than this, allowing the Swiss National Bank to raise its (unremunerated) minimum reserve requirement for banks to 4.0%, thereby significantly reducing the size of the transfers to Swiss banks.

• Offshore wind farms. The UK generates income from the leasing of seabed rights to offshore wind farms. This income – over £1 billion/year – currently goes to the Crown Estate. Rather than taking this into direct government ownership (that a future Tory government would sell off), Andy Burnham might like to run with the King’s suggestion that this should become a Climate Action Fund and used to finance sustainable infrastructure programmes. Nice to have the monarchy on side.

• Levy a £1bn charge on the Bank of England to fund a Treasury initiative to collect the 40% of business taxation that goes currently uncollected.

• Moreover, if the Treasury were to tax capital gains at the same rate as income tax, this would raise £12 billion of extra tax per annum.

Reducing the corporate welfare bill. A large part of today’s welfare expenditure now goes straight to the private sector, not the poor. Several parts of this need to be targeted at the same time. These should include –

• Freezing rents. Follow Mamdani’s lead and announce a rent freeze in advance of a wholesale review of private sector rents and housing conditions.
• Replace the rate exemption on empty properties with an escalating charge, limiting the private sector’s ability to provoke a lettings crisis.
• Create a public sector investment fund, allowing local authorities to purchase (and convert) properties for social housing.
• Instruct/empower/finance local authorities to recruit/re-employ building inspectors to oversee quality standards in any new social housing initiative. This would be the necessary precursor to the broader skill-training programmes needed for a new era of social housing provision.
• Make Mayors (and key local authorities) the drivers of this re-focussed investment strategy. This is of critical importance because ‘the politics of place’ will itself become the cornerstone of a reconstructed sense of democratic accountability. Westminster has become too easy to discredit. The manipulation of social media accelerated this process. More direct (and accountable) lines of decision-making are needed to get past this discrediting process.

At this point, Andy Burnham’s ‘new era’ does not need an elaborate shopping list. It does, though, need a new framework for interventionist political thinking. What we have to find is a way of opening this conversation with him.

Alan Simpson July 2026

alan@alansimpson.org