Business need to 'bail in' to help avert the biggest theats to our way of life. And governments can help them do so.
We are over a decade on from the economic crisis when governments around the world had to step in to keep the financial system from imploding. The order of the day was “bailout”. Faced with banks that were too big to fail, governments had to hand over huge amounts of money. The cost has been significant. Nearly $500bn in the US according to Deborah Lucas of MIT and £27bn in the UK according to the OBR.
These bank bailouts don’t include the tens of billions given to business in tax breaks, grants and other schemes to stimulate the economy. And the total cost of debt interest and opportunity costs resulting from spending this money. To give one example, corporation tax cuts over the decade 2010 to 2020 will have cost the UK taxpayer over £75bn.
Although such action was necessary in order to keep economies around the world functioning, it also primarily benefited those that had the most. The richest have managed to survive the financial crisis with a squeeze in their incomes but their considerable assets still intact and, in fact, growing in value because of quantitative easing. Businesses have maintained their profitability; in fact, the profitability of UK businesses is now at its highest level since 1998. The gains of this profitability have overwhelmingly accrued to the most well-off.
Once governments had exhausted themselves in propping up financial institutions, there was a recognition that more needed to be done to ensure that the burden of future rescues was more fairly shared. The concept of the “bail in” was introduced. Institutions that had lent to banks would need to put their own money in first before governments would step in. It was too late for the original crisis, but since then has been deployed in many parts of the world and for other failing banks.
Now we face new crises, not financial but environmental and social.
So, the question that governments have to ask themselves is whether they want to “bailout” the actors which have got us in this mess or whether they want to “bail in” the vast resources of business to tackle these challenges?
At the moment, we seem to be sleepwalking into “bailout” – just like we did in 2008. On a small scale, the Conservatives have announced a £1bn Green Growth Fund. On a bigger scale, the Green New Deal and Green Industrial Revolution that Labour is proposing will see tens of billions poured into new technology and changes to infrastructure.
The benefits of this approach are clearly the speed and direction which can be given by government. There is also a chance to reshape institutions through using public money.
At a time when the UK is still running a budget deficit and business has benefited considerably from previous government bailouts, shouldn’t we learn the lessons from the financial crash and consider a “bail in” approach at the same time as public investment?
UK businesses are estimated to have a cash pile of over £700bn sitting in banks, waiting for the appropriate moment either to invest or to pay out to shareholders (probably the latter). At the same time, businesses are paying out hundreds of billions in dividends every year. Deploying these resources at scale across the country to tackle climate change and to improve our society would not cost taxpayers anything and could be decisive in meeting the threats that we face.
This doesn’t mean that business has to lose out. If the right conditions are created then encouraging investment in green technology, higher paid jobs and higher skilled workforces could lead to higher rates of return to business. Greater levels of economic activity will not damage profitability over the long term. We will need an agenda to ensure that the returns are fairly shared across society. After all, if “bailouts” were supposed to pay for themselves over time by keeping the economy rolling forward, the same logic works for “bail ins”. Just this time the threats are undermining the foundations of capitalism, not just its financial institutions.
How could this be done? Social enterprises are showing the way forward by putting their social and environmental missions on par with profitability. They are also investing their surpluses back into communities, their people and reducing their environmental impact. Doing good doesn’t mean that these businesses are not financially sound. All the evidence points to their sustainability and resilience. This is a model of business that more companies need to transition to if we are going to deal with the climate emergency.
Governments should act quickly to change company law to encourage all businesses to have a clear social and environmental mission. This would give boards new focus and change corporate culture. It would give citizens the ability to hold companies to account for how they do business and unlock resources for the fight across social and environmental challenges from the private sector, where huge resource is concentrated. Higher levels of reporting on environmental and social standards is also critical to encourage competition between businesses and give us all a picture of who is holding back.
The logic of the bailouts was clear. If you don’t save the banks, the economy will implode.
The logic is equally true the other way around. If we don’t meet the climate crisis and build a fairer society, there won’t be a functioning economy in which business can make profit and shareholders can spend their gains.
So, whilst we invest billions of public money to tackle the crises we face, let’s make sure we change the rules so that we also “bail in” business to save our economy.
Andrew O’Brien is Director of External Affairs at Social Enterprise UK.
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