A Rainy Day Fund

Victoria Barr

Online

The UK was hit particularly hard by the financial crisis, partly because it has a large financial sector relative to the size of the economy. The City is a great economic asset for Britain, but it is also a source of fragility and risk. In this regard, it shares some of the characteristics of the ‘natural resource curse’ where the discover y of natural resources, like oil, brings great wealth to a country, but also fiscal volatility and other undesirable side effects.

Countries often seek to mitigate these risks by creating a revenue stabilisation fund, which aims to smooth income over time and insulate the rest of the economy from the impact of natural resources exploitation.

This report proposes that the UK should establish a financial sector revenue stabilisation fund or a ‘rainy day fund’. Once such an account has built up over time, it would act as a contingency fund in the event of a future financial crisis.

The stabilisation fund would reduce the vulnerability of the UK’s fiscal position that results from its large financial sector, and would ensure that the government is better placed to take action during future crises.