UK shadow chancellor John McDonnell said yesterday that the Conservative government has restored "piece by piece, light touch regulation", an approach to banking oversight that failed to supervise excesses in the run-up to the 2008 financial crash.

Addressing the audience of a London School of Economics public lecture, McDonnell said that the sole novelty Chancellor George Osborne has offered is austerity.

He underscored how the regulatory restraints of the UK financial system are being dismantled, including the ousting of the Financial Conduct Authority chief executive, Martin Wheatley, who after the May election stood in Osborne’s way to a new settlement for the City.

After recalling the successful Tory reconstruction of the banking meltdown as a crisis of the public sector (despite banks being rescued by the taxpayer) McDonnell said that austerity is a political choice.

"There is now close to a consensus amongst macroeconomists that that the austerity experiment has failed. Austerity […] is a profoundly conservative choice since it works to the benefit of the UK’s vested interests."

Both topics, banking supervision and austerity, were put forward in questions by the audience. The former came with a comparison drawn between how differently Iceland and the UK coped with the collapse of the banking system.

"In Iceland they locked people up, I think it sent a message," McDonnell said in reference to the 29 bankers who have been jailed in the Nordic country.

He warned about the loosening of regulations and agreed with a recent article wrote by Sir John Vickers, chair of the Independent Commission on Banking, about the need to rethink banks’ buffers of equity capital.

On austerity a member of the audience said the tone differs now from that shown at the time when Jeremy Corbyn campaigned for the party leadership.

"Today we hear from you some Westminster village soundbites about opposing austerity," the gentleman said.

He continued: "But let’s get real for a moment. There are millions of people in this country who are suffering very badly from the austerity […] What we want to hear from the Labour Party leadership is what it is going to do about the austerity?

Part of McDonnell’s speech focused on the "root and branch" review of the British economy from the standpoint of an anti-austerity party.

One key area is taxation: "We need a tax system which is fit for the twenty-first century, in the era of mobile capital."

As such McDonnell said that Prem Sikka, Essex University professor of accounting, has been appointed to conduct of a review of the role of the HMRC.

"This topic is even more important given the recent revelations about Google’s tax bill and others," McDonnell noted.

Sikka came out with the percentage (less than 3% tax rate) that media outlets have used to measure Google’s $187m settlement, as HMRC has failed to provide details of the deal.

"We need a complete rethink of not just how we spend money but how we earn it. […] How wealth is created and by whom," McDonnell said.

Other reviews under way are the study of Lord Kerslake (former head of the civil service) on the role of the Treasury as separate ministries of economics and finance.

Similarly, David Blanchflower (former member of the Bank of England’s monetary policy committee) is looking at the MPC mandate; and Seema Malhotra (MP for Feltham and Heston) is reviewing the efficiency of tax reliefs to incentivise business investment.

McDonnell said that the Labour Party is also in conversation with a wide range of stakeholders, including organisation representing businesses, financial institutions and regulators.

This dialogue completes the work of the Economic Advisory Committee appointed in September last year, of which among other specialists, Joseph Stiglitz (2001 Nobel Prize in economic sciences) and Thomas Piketty (author of recent best-seller Capital in the Twenty-First Century) are members.

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