Let me court unpopularity. I am going to defend the City of London.
The Global Financial Centres Index ranks London as the world’s Number One Financial Centre. It stays a little ahead of New York, and Hong Kong, which have been fairly consistent as the top three for some time. The only other European centre in the top ten is Zurich. Four top ten centres are Asian, and four are North American.
Many countries would give a lot to have a top ten financial centre. It brings jobs, incomes, and other business on the back of the financial transactions. The Euro area has been trying for some years to knock London off its perch, and replace it with a unified Euro centre in Frankfurt, allied to Paris. After more than a decade of the Euro, Frankfurt languishes at 16 and Paris at 24 in the league.
Centres like Hong Kong, Singapore and Shanghai have studied London’s success and try to emulate it. Only in parts of the UK, the host country to the London markets, does there appear to be so much antagonism to what the City does and what it stands for.
The German government acts as host and regulator to a similar success story in world automotive engineering, though Germany does not manage the world number one slot for volume of cars made. You do not hear the German government trying to impose regulations against the expensive and fuel hungry vehicles German industry specialises in making to sell to the rich of the world. There is no push to set an automotive transactions tax. There is not the same jealousy drive to convert people from Mercedes and Porsche to something more practical and mundane. Even the active German greens are handled in a way which preserves the interests of the motor industry which does so much to sustain the German economy.
Similarly the French government acts as host and regulator to the world class French wine industry. French governments do not spend their time exposing the dangers of wine based alcoholism. They do not think up special tortures for people daring to make wines that only the very rich can afford to buy. They take pleasure in producing wines in France that can sell for thousands of pounds a case. They do not propose to cut their deficit by a special levy on wine producers.
The UK takes the City’s pre-eminence for granted. Politicians of various parties delight in thinking up more new ways to extract more tax revenue, and to expose what they see as the immorality of the actions of some working in the Square Mile. The large revenues that the UK government does draw from the financial industries are crucial to paying for the NHS and wider welfare system of the country.
Is this pre-eminence in danger? Are most right to be complacent, thinking that the City will always be there as the world’s number one whatever we throw at it? Surveys show that tax, regulation and transport feature prominently in people’s decisions on where to locate their financial businesses. They do not look for the lightest regulation – they look for the right mixture of effective and credible regulation with sensible costs. They do not seek the lowest tax rate available, but if you push the taxes too high it does start to drive talent away. They accept that the price of wanting a great City with good restaurants, cafes, galleries, theatres and schools is some inconvenience to travel. However, if you let your transport system deteriorate too much it can cost you business. There are more beautiful cities around the world than there are top ten financial centres.
The UK needs to look after the City, as it is one of the outstanding sucess stories of the UK economy. A medium sized country does not achieve greatness in many areas, so it is important to reinforce success, not undermine it.
It was interesting to see in the figures for tax revenues and spending yesterday that Income Tax is now only up 2.4% on a year earlier. It looks as if the 50% rate is having the predictable effect of lowering revenue. Yesterday’s better figures for borrowing were helped by very buoyant VAT and Corporation Tax, offsetting the very poor Income Tax performance. Recent figures are not conclusive proof of the power of the Laffer curve – I have presented that evidence for CGT here before. However, it is an interesting fact that revenues from Corporation Tax surged,where the government is undertaking a phased programme of cutting the rate, whilst revenues from Income Tax spluttered, where the government imposed a large increase in the top rates.