The financial services industry in the UK is at a crucial juncture. Our new research
report “Not with a Bang but a Whimper” – published tomorrow – highlights the decline in the UK’s competitiveness as a domicile for this sector, and the
increasing likelihood that both companies and workers will take the leap and choose to base themselves elsewhere.
Many will see this as a good thing. The economy is still recovering from the financial crisis, the eventual cost to the public purse of the bank bailouts remains unknown, and the yearly round of hated bank bonuses are impending. On the other hand, losing such a significant contributor to GDP, employment, tax revenues, and the current account balance would inevitably have serious ramifications for the UK.
Judging the net overall benefit of the financial services sector is not easy, but if the Government is to make informed policy decisions about new taxes and regulations then this is clearly a calculation that needs to be made. At the moment, proper figures simply are not available.
Presuming, however, that there is a legitimate reason why other territories look to attract this industry, and that it does have a beneficial effect on the UK economy, then what should we do to stem the tide of departures?
In our survey the overall burdens of tax and regulation were clear favourites as reasons why firms were thinking about leaving. There are several ways to improve the situation. The Government
could:
i) Offer a commitment that broader bank taxes and regulations will be introduced, wherever possible, in conjunction with the other major financial centres.
ii) Put a stop to the current revival of interest in the bank bonus tax, as one-off and unplanned taxes of this kind are particularly unhelpful due to the uncertainty they create, and can be damaging even if they are not introduced
iii) Set a firm (and credible) commitment to reduce or remove the new top rate of income tax at a given point in future, once the public finances are restored to order.
When a government creates a positive atmosphere by outlining a clear plan of appropriate tax and regulation then businesses and individuals feel confident to make investments and to plan for their
futures. It is right given the failures in the recent crisis that there should be changes made to the way financial services are regulated in the UK, and increases in taxation may be necessary to
share the burden of fiscal consolidation, but we should tread very carefully to strike the right balance.
Ted Sumpster is Research Fellow in the Economics Unit at Policy Exchange
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