IT IS NOW almost six years since the UK voted to leave the EU and two years since our formal withdrawal. It will be remembered that ‘The City’ was one of the main battlegrounds during the referendum campaign with a near consensus (Global Britain and a few other key writers excepting) that a vote to leave would spell disaster for the services financial institutions in general and the City in particular.
The remaining side was right in one respect. The city really matters to the UK economy. In summary, financial services are perhaps the UK’s most important private sector asset, generating some £161.4 billion in gross value added (GVA) for the UK economy in 2021 with over £60 billion in exports. This represents around one-twelfth of total UK production. When you consider that financial services only make up about 3% of all jobs, that’s a pretty extraordinary feat.
Moreover, out of approximately one million one hundred thousand employees, perhaps only 300 to 350,000 are employed in what might be called “high finance”. This sector directly generates £75 billion in tax revenue and much more if ancillary services are included. So, we can all agree that financial services, love them or hate them, are critically important to the wealth of the nation.
We must, however, also recap almost every major investment bank, consultancy and the vast majority of politicians who have claimed their departure will lead to mass migration to Frankfurt, Amsterdam, Paris and Dublin. They thought “The City” was only in London because the UK was part of the EU.
As an example of this PwC catastrophism pleaded in April 2016 that a vote to leave would lead to the migration of 70 to 100,000 jobs to the EU by 2020 as a direct result of a vote to leave.
Our sister think tank, Global Britain, argued that was rubbish. We believed the biggest threat to the City of London remained in the EU, as their highly regulated mercantilist approach would actually undermine the City’s competitive advantage over time, strangling the UK’s opportunities in the EU. global scale.
We argued that London’s dominance was more the result of a long-standing global competitive advantage based on London’s unique global position, the myriad of associated businesses and services that provide the growth microsystem, coupled with the perceived UK as a safe haven with relatively low rates. and fiscal stability and security of property rights. On top of that, recreating skill clusters elsewhere, or even the depth of the capital pool was no easy task. Barriers to entry were therefore high and the EU misunderstood the root cause of the strength of UK financial services and the ability of others to replicate it.
So what has happened since the Referendum? Well, the City has not only solidified its European position, but remains on par with New York as world number one.
Indeed, as indicated in the Global Financial Center Index, only one other European center, Paris, is even part of the world’s top 10 and it is 10th! The next stop is Frankfurt in the 14th and Amsterdam in the 17th. London has no serious challengers and frankly none seem to be emerging as the EU remains convinced that regulation and control is the roadmap to success. In this he is deceived.
Although a challenge from the EU seems highly unlikely, especially given the multiple challenges facing the Eurozone, London should be cautious. First, Brexit offers a huge opportunity for regulatory divergence. Yet beyond repeating past commitments to liberalisation, so far there has been little tangible in terms of reducing costly and unnecessary regulations, from MiFID2 to capital adequacy rules to cite just two. Words are not enough; we need to see evidence of action.
Second, and perhaps more seriously, the UK’s reputation as a low tax and stable jurisdiction has been badly damaged. Taxes are now at their highest level in 70 years and are converging not with Singapore but with the EU. This seriously compromises the attractiveness of the United Kingdom, in particular the substantial increase in corporation tax. Ultimately, this may be counterproductive.
A third important risk is the attack on property rights and even the rule of law. Increasingly, regulation is retrospective and often appears arbitrary as HMG scrambles for a short-term political fix rather than long-term strategic advantage. While the UK has not been alone in sanctioning sovereign assets, it will not go unnoticed globally and will no doubt undermine trust in the sanctity of property rights. This may or may not have been politically justified, but the net effect is to strengthen Asian and other emerging markets relative to Western markets. There was no debate about the wisdom of this. A reaffirmation of a commitment to property rights would be helpful.
Likewise, an endless tangential regulation from wake up guidelines, to net zero interference in free market decisions, also comes with a very high price. We are far from free markets while the environment, social and governance (ESG) literally take center stage, to the detriment of the economic imperative.
Our economy and that of most Western nations is under greater threat than at any time since the 1970s – continually weakened by rapid, short-term political response. Monetary extremism and near-zero interest rates, massive and largely unproductive government budget spending, heavy regulation and net zero, lockdown and now Russia sanctioning have seriously undermined the very foundations of Western economies. . City have held up well against this so far and have certainly done better than our European rivals confounding our remaining friends, but if this is to continue we need to break the mould.
We need to strengthen the rule of law and property rights, not undermine them, we need leaner, smarter regulation that will strengthen the UK’s comparative advantage and we urgently need to reverse these increases very harmful taxes. We must view divergence as an opportunity, not a threat.
The City have the building blocks to be the undisputed world leader, but which politician will defend it?
Ewen Stewart is a city economist whose career spans more than 30 years. He is director of Global Britain and co-founder of Brexit-Watch.org.