“Could the UK live without the City?” asks Newsnight’s Paul Mason. This is a question many have asked since the financial crisis. The UK suffered disproportionately from the crisis and the resulting recession. Would we be better off if we didn’t have such a large financial sector? When the bankers threaten to leave the country, whinging about bonus restrictions and regulation, should we give them lifts to the airport? Would it matter if the whole lot of them buggered off somewhere else?
Alas, much as it would please many people to rid Britain of the horrid bankers, a mass exodus of financial services firms would be very damaging. PricewaterhouseCoopers estimates that, even in their moribund state, financial services firms contributed about £53.4 billion in tax during the last financial year; around 11.2 percent of government revenue. Of this, the banks’ share is around 66 percent, so about 7.5 percent of the government’s total tax take. In 2007, before the crisis, FS firms contributed £67.8 billion, or 13.9 percent of the government’s revenue.
While rebalancing the economy is a fine aim, it is not something that will happen quickly. Britain had a large financial sector even when it was the workshop of the world. Banking and finance has played a significant role in the UK economy for centuries; more important, relative to other industries, than in most other comparable economies. Just reducing our reliance on the financial sector will take time and a lot of investment. Eliminating it would just make us poorer.
But what about all the money we have had to cough up in bailouts? Doesn’t that offset the amount we get back in tax?
Not really. At the time of the bailout, the cost was estimated at £850 billion but this was only a potential loss. No-one knew how much money would be needed to save the banks and how many of their assets would turn bad. In the event, mass mortgage defaults didn’t happen, banks did not need to draw on their insurance and some of the assets bought by the government delivered a profit. In December the National Audit Office (NAO) calculated the cost of the bailout at £124 billion with a total potential loss of £512 billion were the supported banks, loans and assets to fail.
But failures and losses on this scale are now looking much less likely. The NAO doesn’t expect these costs to rise significantly unless there are further shocks to the global financial system. Most commentators believe that the government will probably be able to recoup its money. Some optimists think that the bank bailout might make a profit for the taxpayer. Even the more cautious NAO now expects the Exchequer to break even.
But what about the interest payments? Didn’t we borrow that money to bail out the banks? Well even that is running in the taxpayers’ favour at the moment because, although we are paying out £5 billion in interest each year, this is offset by £9.91 billion in fees and interest being charged to those bailed out.
So, on balance, although we had to pay out a lot to bail out the banks, the eventual cost of doing so will probably not be very high. If PwC’s figures are correct, the banks continue to contribute around £35 billion even when they are doing badly, and this will go up again as their performance improves. Taken as a whole, then, while their antics and arrogance might make us angry, and we had to put a lot of cash on the line to bail them out, the taxpayer still makes a net gain from the presence of large banks in London.
And what of the general economic havoc that their behaviour wreaked on the economy? That would have happened whether the banks were based in the UK or not. The contagion caused by the collapse of large international banks like Lehman Brothers showed no respect for international borders. The resulting financial crisis caused a severe global recession. Countries with much smaller financial sectors than ours have also seen their levels of debt shoot up. This is largely because their tax revenues fell and their benefits bills went up. That would have happened here too, even if we had no major banks in London.
None of this is to say that we should not regulate the banks more tightly and make them set aside more capital as an insurance against further failure. If this means we have to wait longer to sell them off, so be it. We need some insurance against having to bail them out again. Despite all their blustering, regulation, taxes and capital requirements are unlikely to scare the banks off, provided we don’t go mad. Bankers like London and, even though they like to make a fuss, they seem very reluctant to leave. Given that other countries are putting more regulations in place, the UK should not be afraid to get tough with the banks.
There is, however, a difference between getting tough and just being vindictive. Forcing the banks to relocate, much as it might please some people, would knock a great big hole in the country’s finances. Britain is a financial centre and has been for centuries. It is unlikely that we could get good enough at anything else quickly enough to replace the lost revenue if our financial services firms were to leave the country. Like it or not, financial services will be one of the industries that powers the UK’s economic recovery.
Much as it might cheer us up to think of streams of refugee bankers heading for the channel ports, the suggestion that the UK would be better off without its financial services sector is nonsense. Amusing nonsense, fashionable nonsense, but still nonsense.