Public debt limiting next government’s ability to invest says Lloyds Banking Group’s Charlie Nunn
The chief executive of Lloyds Banking Group – the UK’s biggest lender – has warned whoever wins the general election that they will not be able to fuel growth by increasing government borrowing.
Charlie Nunn said the UK’s national debt had been forced higher in the last decade and a half due to “massive shocks” such as the global financial crisis, the pandemic, the war in Ukraine and also by some issues specific to the UK economy.
Limits on investment
And, speaking exclusively to Sky News, he said this would limit the next government’s ability to invest.
He said: “We have increased the government debt ratio for the UK. And…we should just accept the government can’t pay its way out of this next stage.
“The US in the last few years has gone up to a… 7.5% government [deficit] to GDP ratio. The US can do that because it’s growing at above 3%, but also it’s [the US dollar] the world’s reserve currency.
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“We don’t have those options in the UK – but what we do need is a really clear plan and set of priorities for the UK. And then…we need to find the right way of getting the very material amount of private money, international and domestic, that is excited about investing in the UK to invest alongside government.
The biggest challenge
“I think we can create that positive momentum for investment in jobs and business growth. And then that will feed through into the economy. That has to be the unlock from these three or four very systemic shocks that the UK economy has experienced in the last 16 years.”
Mr Nunn, who has served on both Prime Minister Rishi Sunak’s business council and the British Infrastructure Council launched by the shadow chancellor Rachel Reeves, said this would be the biggest challenge for the next administration.
He added: “When you look at the next few years for the next government, the real issue is how are we going to get investment into the economy – and that investment isn’t going to come from the government. It’s going to have to be crowding in international foreign direct investment, leveraging the banking system to really support customers, investing in their businesses and creating jobs and employment in growth and then supporting other financial institutions and pools of capital like pension funds for that investment.
“So the real focus has to be how do we get some growth going and how do we bring in private money alongside the government to make that difference? And that’s what will give the best outcome for the country, but also the government’s own finances.”
‘Very high’ business sentiment
Mr Nunn, who said business sentiment was “actually very high” at present, said a clear government plan and set of priorities could unlock three things.
He went on: “The first is we need to get more private, both domestically and international investment into the UK to support growth, and that needs to come with some supply-side reforms.
The second is housing. Housing really is an important topic for the UK, from social housing all the way through affordable housing and in the broader housing market. We think you need a 10-year plan to unlock the housing investment that would be needed to really make a difference.
“And then the third thing that we think that could make a difference is focusing on long-term savings and investments, both building financial resilience for businesses and consumers in the UK, but also then how we use those savings, those savings pots, to invest back in the UK economy.
“We think there’s opportunity to do more.”
Pic: Reuters
Investors looking for ‘stability and a plan’
Lloyds is the owner of Halifax, the UK’s biggest mortgage lender, as well as being the UK’s biggest current account provider and one of its biggest players in business banking and credit cards and owner of the life and pensions giant Scottish Widows.
Mr Nunn said that, as chief executive, he met many businesses and was clear what they wanted from the next government.
He went on: “I spend a lot of time with entrepreneurs across the UK, but also big international finance houses, whether they’re pension funds or institutions looking to invest in the UK. The first thing that’s consistent across them is they’re looking for stability and a plan.
“And I think that’s the first thing for a new government, which is to provide that stability and to provide thinking, in some of these areas around infrastructure and housing, which is 10 years thinking not shorter-term thinking. So that’s the first thing they’re looking for.
“The second big theme, which is really consistent, is there are some supply-side issues… which are getting in the way of businesses getting a return on their investments. And obviously, there’s been good discussion around planning around connectivity to the [electricity] grid, around skills. Those are the three topics that businesses always identify.
‘Two to four times longer to get a return on UK investment’
“And what does it mean for investors, whether it’s a business or international investor? Typically, they’ll tell you it takes two to four times longer to get a return on your investment in the UK than it does in other countries of the world. And that’s really where we need to focus.”
Interest rates
Mr Nunn, who in August will mark his third anniversary as chief executive of the black horse bank, said the interest rate cuts from the Bank of England expected later this year would be “beneficial” – but warned homeowners not to expect a return to the ultra-low interest rates seen for most of the last 16 years.
He added: “Of course, the short-term impact of interest rates is going to impact, first of all, the government on the cost of government debt. That will be important. And secondly, it’ll make the cost of borrowing for businesses short term more attractive…that’ll be important.
“In terms of the impact on the broader consumer in the UK, it’ll take longer to feed through. Around mortgages specifically, we’ve just come off a decade where mortgages have been in the 1.5-2.5% range.
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“The expectations the market have is that interest rates probably won’t get below 3.5%. And that means mortgages, or the new normal for mortgages, will be in that 3.5-4.5% range, not 1.5-2.5%.
“So there is going to be a higher cost of borrowing in the economy, probably based on what we can see happening at the moment.
“But a reduction in rates will be good for the government’s own capacity to invest and will support the economy and it should be good for business.”
Bank of England proposals
Mr Nunn also questioned proposals for the Bank of England to pay no interest to banks on the reserves they have deposited at the Bank of England – a measure that Reform UK has claimed could raise £40bn that could be used to cut taxes.
The Lloyds chief executive said: “Obviously that will be a political decision and not one that we’ll get directly involved with. The statement from the governor of the Bank of England was an important one in this context…he wouldn’t support it because it would start to undermine monetary policy and specifically how…interest rates feed through into the economy, through the commercial banks, through organisations like Lloyds Banking Group.
“I think that’s a really important consideration. In terms of the quantum of impact, there are various estimates out there, but I think the quantum of impact that’s been talked about is significantly more than I think would be realistic. And so it will be a political choice.
But you really need to look at the integrity of what the Bank of England does and whether or not monetary policy works effectively in the economy.”
Growth through financial regulation
Mr Nunn also said there was an opportunity for a new government to boost the economy through financial regulation, building on the new objectives recently set for financial regulators by the current government, which obliged the Financial Conduct Authority and the Prudential Regulation Authority to enable competitiveness and growth both for the banking sector and the UK economy as a whole.
Stressing he was not calling for a return to the looser regulation seen prior to the financial crisis, he added: “There are choices about how do we help customers take the right level of risk…how do businesses and entrepreneurs take the right level of risk and what can financial services do safely to support that?
“When I look at what the UK is doing relative to other countries, we haven’t had that as a really clear objective and I think there’s more we can do that can untap opportunities for businesses, for families in the UK, over the coming years.”
He said the US and Canada could be a good template for the UK in that respect.
Shares in UK banks have fallen sharply on the back of a report which urges the chancellor to place their profits in her sights at the coming budget.
As Rachel Reeves stares down a growing deficit – estimated at between £20bn-£40bn heading into the autumn – the Institute for Public Policy Research (IPPR) said there was an opportunity for a windfall by closing a loophole.
It recommended a new levy on the interest UK lenders receive from the Bank of England, amounting to £22bn a year, on reserves held as a result of the Bank’s historic quantitative easing, or bond-buying, programme.
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It was first introduced at the height of the financial crisis, in 2009.
The left-leaning think-tank said the money received by banks amounted to a subsidy and suggested £8bn could be taken from them annually to pay for public services.
It argued that the loss-making scheme – a consequence of rising interest rates since 2021 – had left taxpayers footing the bill unfairly as the Treasury has to cover any loss.
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Why taxes might go up
The Bank recently estimated the total hit would amount to £115bn over the course of its lifetime.
The publication of the report coincided with a story in the Financial Times which spoke of growing fears within the banking sector that it was firmly in the chancellor’s sights.
Her first budget, in late October last year, put businesses on the hook for the bulk of its tax-raising measures.
Ms Reeves is under pressure to find more money from somewhere as she has ruled out breaking her own fiscal rules to help secure the cash she needs through heightened borrowing.
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Is Labour plotting a ‘wealth tax’?
Other measures understood to be under consideration include a wealth tax, new property tax and a shake-up that could lead to a replacement for council tax.
Analysts at Exane told clients in a note: “In the last couple of years, the chancellor has been protective of the banks and has avoided raising taxes.
“However, public finances may require additional cash and pressures for a bank tax from within the Labour party seem to be rising,” it concluded.
The investor flight saw shares in Lloyds and NatWest plunge by more than 5%. Those for Barclays were more than 4% lower at one stage.
A spokesperson for the Treasury said the best way to strengthen public finances was to speed up economic growth.
“Changes to tax and spend policy are not the only ways of doing this, as seen with our planning reforms,” they added.
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