Historically the City of London was the financial entrepôt of the British Empire. The loss of empire might have led to the collapse of the City’s industries, just as it contributed to the downfall of Tyneside shipbuilding and Lancashire textiles. Instead, in the last 50 years, the City of London has flourished by becoming the world’s foremost centre for international financial transactions.
Whereas in the late 20th century the British economy as a whole fell behind the global average in the growth stakes, the UK’s international financial services industries enjoyed a long boom. Partly because the output of the financial sector tends everywhere to increase faster than that of manufacturing in the course of economic development, the City of London was impressively dynamic even in a fast-growing world economy. Official data show that in 1986 the UK’s exports of financial services were £2 billion. In 2008 they were £52.8 billion, implying a compound annual growth rate over 22 years of 16 per cent.
But the £52.8 billion figure does not allow for a range of ancillary activities, such as the legal, accounting and information technology back-up required by the financial products of the modern world. In recent years the “City cluster” — with the ancillary activities included — has probably accounted for exports of £70 billion a year or more, roughly equivalent to 5 per cent of our national product and almost a fifth of our total exports of goods and services.
Again historically, the prosperity of the City owed much to the Bank of England. Privately owned until 1946, it retained its private sector ethos for a few more decades. When the structure of securities trading was transformed by the Big Bang in 1986, the Bank — discreetly, but deliberately — encouraged the large British clearing bank groups to participate in the emerging boom in international financial services. These services, such as foreign exchange trading and the origination of derivatives, were “wholesale” in character and often very complex. They had relatively little to do with the clearers’ traditional retail business.
The clearing bank groups responded in different ways to the new challenges. No doubt they made many mistakes, as did the foreign organisations — such as the American investment banks — with whom they were competing. Nevertheless, overall the boom in international financial services has been one of Britain’s few undoubted economic successes in recent decades, and it has certainly been fundamental to the marked regional prosperity of London and the south-east. During the premierships of Thatcher, Major and Blair, it was taken for granted that officialdom would continue to bless “the City cluster”.
All this has changed in the last three years of crisis. Government and regulators have brazenly attacked banking and finance. Whereas his predecessors enthused about the vitality of the City’s various industries, the present Governor of the Bank of England, Mervyn King, has led the official criticism. In an extraordinary interview in the Daily Telegraph on March 5, he used the words “casino” and “zero sum game” close to the phrase “financial services”. In other words, activities which contribute about a fifth of Britain’s exports were being equated with a “casino” and “a zero sum game”.
In addition to the verbal assault and more regulation, the British state has imposed extra taxes. The most conspicuous of these is the “bank payroll tax”, otherwise known as the “bonus tax”. Under its terms, any financial organisation which awards discretionary bonuses in excess of £25,000 has to pay a special levy to the government. In practice the tax is being applied not just to the banks, but also to fund management and brokerage companies, although these have nothing to do with commercial banking. The bonus tax is a crude smash-and-grab raid on a successful part of the economy, in which high productivity has led to high personal incomes.
The City cluster has come to Britain quickly, as it did not exist on its present scale 30 years ago. It could also leave Britain quickly. It is an open secret that two of the world’s largest banking groups — HSBC and Barclays — have plans to move their headquarters, and almost certainly a big chunk of their operations, from London. In other words, public policy — the policy of an allegedly “Conservative” government — now puts pressure on our most internationally successful sector to relocate to foreign centres. The Budget announced on March 23 was billed as “a Budget for growth”. With the monstrosity of the bank payroll tax remaining on the statute book, that description is a sick and pathetic joke.