The financial crisis of 2008 left deep scars on the British economy. The average UK household is now estimated to be 16% poorer than it would have been had that crisis never occurred.

Given that average annual household income is around £55,200, this suggests each one is losing out to the tune of £8,800 per year.

Globally, it is estimated that around 100 million more people are living in absolute poverty as a direct result of the crisis. Meanwhile, government debt levels around the world increased by a third.

Ever since the crisis, the general consensus among politicians and economists seems to have been that tight financial regulation is necessary to ensure a similar disaster does not happen again. The Bank of England in particular has been a global leader in pushing for new types of international safeguards.

Now though, the UK government is leading calls for financial red tape to be cut. Breaking from its traditional position as an advocate for strong regulation, the Labour party has promised “the most wide-ranging package of reforms to financial services regulation in more than a decade”.

The idea is that easing up on the rules will boost growth by encouraging bank lending and attracting international finance. The prime minister, Keir Starmer, appears to believe that strict regulation has dampened activity in a sector which the UK economy relies upon. As his chancellor Rachel Reeves put it, existing regulation “has gone too far in seeking to eliminate risk”.

And it’s true that some regulation has been overly complex while producing few tangible benefits. But the changes signalled by Reeves and Starmer point to a much broader project of rolling back key safeguards that were put in place to avoid a repeat of the financial crisis.

This year, some of the regulations aimed at limiting risky mortgage lending – a key cause of the 2008 crisis – have been loosened. And Reeves has promised further sweeping changes which would, for instance, dismantle key parts of the “ringfencing” regime which separates risky investment banking from retail banking.

In doing so, she is ignoring repeated warnings by regulators (including the Bank of England) who stress that such moves will make the financial system much less stable.

The risks attached to these changes are even more worrying in an environment where Donald Trump is pushing an aggressive agenda against regulation. The US and UK are both hesitant about implementing the newest version of an international framework for banking regulation which is widely regarded as critical to continued financial stability. The future of that framework will be uncertain if two of the world’s biggest financial superpowers withdraw their support.

Starmer clearly feels under pressure to do something to combat the UK’s sluggish economic growth. But if one lesson can be taken from the 2008 crisis, it is that a small boost to economic growth at the expense of long-term stability will ultimately result in much greater losses.

Even in the absence of a full-blown financial crisis, the Bank of England thinks that the higher level of instability and uncertainty associated with a laxer regulatory regime will cancel out any small short-term benefits. This chimes with the findings of my latest research, which shows that even these short-term gains are far from guaranteed.

Underlying the new enthusiasm for deregulation seems to be a belief that the financial system is now stable enough to withstand economic shocks, even if regulations are rolled back. But recent events clearly show that the risk of a financial crisis continues to bubble near the surface.

Just two years ago, problems at the relatively small Silicon Valley Bank led to a bank-run which had spillover effects across the US. In the UK, Liz Truss’s infamous mini-budget of 2022 led to a dramatic spike in government bond yields and caused a spate of near-collapses across the pension fund sector.

Potential economic crises which are ultimately avoided are all too easily forgotten. But these episodes should remind us that financial markets can be unpredictable, and small events can spiral out of control. Paving the way for more risk, as Reeves and Starmer are doing, is a serious gamble with unpredictable consequences.

Budget 2025 event advert with the chancellor's famous red briefcase.

Budget 2025 event advert with the chancellor’s famous red briefcase.

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The research underlying this article has been supported by funding from the Economic and Social Research Council (ESRC).