Mark was asked by the House Magazine to examine the ambition of some politicians to end the dependence of the British economy on the City of London.
Since time immemorial, the City of London has enjoyed an international reputation as a bastion of commercial certainty and reliability. It has promoted financial innovation, provided an international market to global merchants and in commercial affairs has rightly been seen as a watchword for justice, neutrality and fairness. As a result London has emerged as the global financial centre.
But this priceless asset to the UK economy is now being scrutinised as never before. The financial crisis has painfully highlighted our economic dependence on the City and our collective exposure to the risks taken by the banking sector. As we contemplate our future in the new, post-crisis economic landscape, many now suggest that it is time to wean ourselves off the City’s false riches by diversifying our economy. But is this a realistic or desirable goal?
That failure in any single sector of the economy overexposes the domestic taxpayer seems unwise. The City’s dominance over the past decade has also had wide-ranging social consequences. For a large proportion of British people working outside the gilded corridors of the financial services industry, the growth of the City’s power simply increased the cost of living and reduced to a wistful dream any prospect of getting on the housing ladder (except via colossal personal debt). It could also be argued that the City precipitated a brain drain from other professions and industries, with our brightest and best graduates tempted away by the unrivalled starting salaries in banking jobs.
Framed in these terms, the desirability of a movement away from over-reliance on the financial sector seems sound. But when we talk of reducing our economic dependence on the City, are we sure that the UK offers similarly strong sectors to take its place? My fear is that many desire a smaller City, not out of pragmatism but rather an ideological distaste for financial services. In this feverish political atmosphere, let us not forget why – on the whole – a thriving City makes for a successful Britain.
It is not just banks that benefit from our financial sector but complementary industries such as law, insurance, retail and entertainment. So too do top flight universities and the arts and social charitable sector gain, the latter two from cultural funds or corporate responsibility grants often provided by the City’s top banks and bankers. The presence of our large financial sector gives London the critical mass to attract the best professionals from across the globe.
The banking bailouts notwithstanding, the City contributes massively to the Treasury’s coffers in terms of tax revenues and employment. It also plays a critical role in supporting business, whether that be in drawing huge inward flows of foreign capital to help build our infrastructure and prop up our companies or in providing British companies access to diversified sources of capital to enable them to invest and expand.
Even if opposition to City dominance is practical not ideological, I suspect that not only is it unlikely that any other sector will be a world beater anytime soon but that London’s population is insufficiently equipped to deal with significant growth in new industries. Few people realise that at 9%, London has one of the highest levels of regional unemployment in the UK. With Britain wedded to a model of high housing and employment benefits, those living in the Capital need to earn considerably more than the minimum wage to make it worth their while to work. As a corollary, it has been far easier in recent years to encourage hard working migrants to fill the jobs that Londoners have been unwilling or unable to take up themselves. We now have a large proportion of the indigenous working-age population without the skills or inclination to fill jobs of any description.
A nation of only sixty million people should be grateful to have one world-beating industry that is, in normal times, incredibly lucrative and feeds a panoply of other sectors. By all means, we should build up other sectors if we can and reduce the exposure of the taxpayer to risk. But economic diversification will be no easy option and should not lead to the neglect or diminution of the City – indeed if it does, the task of diversification will be far harder. Global businesses and their highly-skilled work forces do not necessarily have an innate loyalty to the UK. They will go where the legal, fiscal, regulatory, physical and social environment works best for them.
In this respect, more pressing than diversification must be the need to make the UK a place of possibilities, enterprise and entrepreneurship. I shall be working with the City of London Corporation in advance of next autumn’s Pre-Budget Statement to amass reliable, qualitative and quantitative evidence about the exodus of companies and high net worth individuals away from the UK following the imposition of a 50% higher rate income tax band. It should be the priority of politicians of all colours to get that most important of messages out: that the UK welcomes business, whether in the financial services sector or indeed any other industry.