A year has elapsed since I last wrote a piece on this subject, but the battle for common sense has still not been won. It was heartening that Lord Heseltine, in a recent press interview, made the point that it was foolish to attack Britain’s biggest industry:
“The Financial Services Industry is hugely important to the British economy; if you want to be world competitive, then you have to pay the sort of money that the industry will pay. You cannot run a capitalist economy without banks”.
After the NHS, it is the biggest UK employer. It is the biggest exporter, with British business exports at over £100bn, making a major contribution to all our imports from Asia. Recent City of London Corporation research found that the direct taxes paid by financial services businesses and their employees, though down £8bn on the previous year, were £53.4bn in the last financial year, contributing 11% of UK tax revenues. This, however, excluded VAT, Customs, Capital Gains Tax and Inheritance Tax revenues paid by employees of the industry – which if included would raise the total to over 15%. This also excludes other related territories – lawyers, consultants, advertising and marketing agencies plus other sophisticated “City” services.
Measured in a different context, the only part of the UK which is tax positive is London and the Home Counties which contributes of the order of £50bn p.a. to other parts of the UK, especially Scotland, Wales and Northern Ireland.
It is appropriate for a mature economy such as the UK to earn its keep in the world by its brains rather than its brawn, which cannot compete with the low wages of Asia and Latin America.
The concept that a revival in manufacturing industry could replace the employment, exports and tax revenues of the financial services and related sectors is, palpably, ludicrous.
The problem is bonuses. The public does not mind footballers earning huge sums of money, even if it results in the Clubs for which they play getting into financial difficulties; but huge bonuses for bankers are unacceptable. I have some sympathy for this view. In part because it has been the tax payer who has had to bail out the banks, but also because successful traders may be risking their bank’s (customers’) cash and not their own.
Historically, those working for investment banks and stock brokers, who mostly also owned the businesses, did extremely well when business was good, but often had to sustain their businesses from their own pockets in bad times. But it was unheard of for commercial bankers to receive large bonuses 30 years ago. The change has come about as commercial banks took over investment banks or developed investment banking activities and the long established bonus culture of investment banking spread to commercial banking. Like the managers of Football Clubs, the executive management of Banks are effectively prisoners of their bonus culture.
If banks were “forbidden” to pay substantial bonuses in the UK, the “performing” individuals and their business would move elsewhere, where large bonuses were possible. Within the UK, if some banks pay no or small bonuses to their top performers, as experience has shown, they get “poached” by other banks paying generous bonuses. The practical reality is that initiatives to reduce the banking bonus culture must be international.
There are, however, two ameliorating factors, the one that taxation of 51% is paid on large bonuses and the other that the tax payers’ investments in banks, made in the course of the banking crisis, were made at rock bottom prices and are likely to reap gains as the banking system recovers. The tax payer ought to end up making a good profit out of supporting the banking system.
There is, moreover, no reason why other parts of the UK economy cannot grow, particularly with a competitive currency. A large financial sector is not “squeezing out” other industries. Rather there is an advantage in having the City of London to raise money domestically and internationally for new investments. While no Central Bank or Government can guarantee that banks will not run into trouble in the future, the fundamental causes of Britain’s credit/banking crisis were wrong economic, monetary and regulatory policies – all the responsibility of the Labour Government. It is to be hoped that a re-built, professional Bank of England will be capable of supervising the banking industry satisfactorily as it did for 100 years from 1870. In buoyant economic times, appropriate monetary policy is needed to restrain excessive lending and borrowing.
It is also apparent that Britain needs a more competitive banking industry, which Government can encourage. But the key points to be grasped are that banking is only one part of the financial services industry and the financial services industry is part of Britain’s overall successful, international business services industry: and without this we would all be a great deal poorer.