According to a report in the Financial Times this morning:
Global banking executives have warned that they will divert investment away from the UK if taxes on the sector are raised, telling Andy Burnham's government that it risks further damaging London's position as a financial centre.
Senior bankers said they would no longer choose the UK as their main European hub in the same way as they did before Brexit, according to a survey of US, EU, Asian, African and Middle Eastern lenders with large British operations by the sector's main lobby group.
The comments emanate from a UK-based lobby group called UK Finance, which is, unsurprisingly, supported by the UK banking sector. Also unsurprisingly, the Financial Times, which knows on which side its bread is buttered, has faithfully reported them.
The questions that arise, however, are whether we should take the threat seriously and, at least as importantly, whether we should worry about the risk of it happening.
The failure of the City of London
When it comes to the threat, I have great difficulty in believing what is being said. Whilst it may be true that the reputation of the City of London, and its significance in the European banking market, may not be as great now as it was before Brexit, there are very obvious reasons for that.
One is Brexit itself, but more significantly, London's reputation has not recovered since the 2008 financial crisis, which required far bigger bailouts in this country than elsewhere, indicating the scale to which UK finance failed. That story of failure, more than anything else, may explain why London lacks the appeal other markets now have.
Combine that with the fact that, as the London Stock Exchange regularly suggests, there are many fewer new companies now wanting to list their shares in the City, precisely because the UK so long ago gave up producing anything of value that might create a company of worth, and focused on financialisation instead, and you have the perfect mix for a declining operation, which is what the City of London now is.
My suggestion is that UK Finance is looking for an excuse to cover banks' failings rather than offering any form of serious analysis.
The finance curse
The second question, however, is the more relevant one. Should we be worried? The answer is very definitely no; we should not be worried.
The City of London has had a corrosive influence on the UK economy throughout the entire neoliberal era.
Margaret Thatcher destroyed manufacturing in the UK to deliberately promote financial services in its place. In the process, she reoriented the country's economic focus to London and its hinterland. As a consequence, she utterly skewed the income and wealth distributions of the UK. That undermined the fortunes of the other countries in the United Kingdom and regions of England outside the South East.
As a result, she also created a powerful lobby interest that continues to this day, even though it has never created much of real value.
Thatcher was utterly confused when it came to economics. She thought that a £1 increase in the value of activity undertaken to meet human need was equivalent to a £1 increase in the value of a financial asset, like a property or a share, when that is utterly untrue. Meeting need creates real wealth. Increased financial worth provides a false impression of well-being inside a bubble that must eventually burst, as the UK economy is waiting to do.
Her misplaced belief is what drew, over the years, hundreds of thousands, and maybe millions, of people with talent who could have created real products, companies and genuine wealth for society into meaningless careers in the City of London, which might have created personal fortunes for them, but which came at the cost of the destruction of genuine economic process and value creation for everyone else in the UK.
Far from creating value, that created the finance curse, which describes the way in which the City of London has drained the country's productive activities of talent, has distorted its wealth distribution, and inflated the exchange rate to bring hot money into the UK, at a cost to us all in terms of inflation, excessive mortgage costs, unnecessary unemployment, and continued beatings from the Bank of England.
Should we therefore regret that the City's finance sector might shrink in size? I reiterate, the answer to that question is most definitely no. This is a necessary transition that might enhance our chance of genuine well-being.
And do not, for one minute, think that tales of falling tax paid will be of consequence. Tax does not fund public spending; government money creation does that. And if the government spends to put to use the idle resources a shrinking finance sector creates, it will always add value to the economy and recover the spending through the multiplier effect. This means any claims by the banking sector that we depend on them to provide health, education, defence, criminal justice, and more in the UK are just more nonsense that reveals the scale of their ignorance of how our economy really works, which is why we can do without them.
The bankers can, then, complain, as they always do, about the injustices heaped upon them by the state on which they are utterly dependent for the creation of their own well-being, because without the money it creates they would have nothing to do. We, however, should properly understand that we could do with many fewer of them, and will be better off as a result.
Why tax banks more?
So, should John Healey increase the taxes on banks in October? To this, my answer is an undoubted yes.
That, though, is not because we need the money that such a tax will raise. I reiterate, government does not spend tax receipts; it creates the money it requires when it spends. There is no such thing as taxpayer money. But what that, however, means is that tax plays a fundamentally different role within our economy from that which these bankers think.
Tax has an essential role in controlling inflation, but beyond that, in allocating resources within the economy so that they might be used to best effect. The City of London has for far too long made excessive demand upon our resources, with consequent cost to us all, and if this tax achieves a desirable goal of re-allocating activity away from the overblown banking sector and into other activity which can create genuine value inside our economy, it will be a success.
Taxing banks more is, then, something John Healey should most definitely be doing this October. We could all win as a result.
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Might it be that valid governance is based upon, and guided by, transparency, equity, pro-social security and sustainability of its environment and itself and not upon threats from the main stream promoted finance group?
I would love to see the space currently taken up by parasitic finance in the City turned over to the public to create community farms and gardens, along the lines of Calthorpe Community Gardens near Kings Cross.
And when Healy does increase tax on banks they will promptly increase account keeping charges to compensate their shareholders and punish the govt. Which brings me to a wish list that any of the governments in Britain create a bank for ordinary folk based on good service delivery to both depositors and borrowers giving all a sense of security knowing their savings and contracts are safe and being used and managed sustainably and responsibly. Such banks existed, sort of, once around the world until they were sold off in the mad Thatcher inspired sell off of many public owned assets in the 8Os and onwards.
Whilst I agree about government created retail banks, I have previously supported retail accounts at the Bank of England, I think you are wrong about the banks increasing their charges to “punish” the government.
Banks don’t care about the government, they only care about profit. They wouldn’t do anything to “punish” the government if it impacted their bottom line, as increasing their charges would.
If banks could increase their charges they would already have done so to make more profit. Increasing charges would only push customers to competing institutions that charged less.
Increasing charges is an oft repeated but false argument. “If government taxes buy-to-let, landlords will put their rents up” – if they could do so it would already have happened. “Bond Vigilantes will demand higher rates” – they might like higher rates, governments may acceed to that demand (heavens knows why), but government is tightly in control of rates should they choose to act (Japan).
The government controls taxes and companies, including banks, just have to suck it up; they don’t have the power to “punish the government”.
The UK must stop paying interest on central bank reserve accounts, there’s £10-15bn a year saved and hit the banks with a windfall tax.
If the US banks want to leave the real world will not end.
I agree
Thank you, Richard.
I used to work for what became UK Finance, the British Bankers’ Association, and would not pay attention to them or the FT.
Few banks run international activities from London. It’s not just Brexit. The rest of the world is moving on from reliance on western finance. Banks from emerging markets are scaling back from the UK and, where necessary, setting up EU outposts.
UK Finance is dominated by the big high street banks. The big foreign banks have some influence, but, post-Brexit, are not that bothered. Asian, including west Asian, and African banks have never had any sway there. They tend to belong to the Association of Foreign Banks.
Even if there’s a rapprochement with the EU, these activities will not return.
Thank you
“big high street banks”? Do you mean the big banks that used to be on high streets but no longer have any interest in being there? (They might say they have no need to be there, if course.)
Thank you.
Yes.
I used to work for HSBC and Barclays, but had little to do with their UK activities.
Lloyd’s and Barclays are scaling up activity outside the UK, undoing the retrenchment of the past three decades for Lloyd’s and decade for Barclays. Their UK focus is on the affluent.
This country needs a network of regional development banks and agencies and nationwide development and commercial / high street banks.
I agree with the last
First, if the financial sector would be reduced in size – bring it on.
Second, is it possible for the finance industry to actually reduce foreign investment, given that that investment is made in pounds sterling and the amount of money available is largely outside their control? That is, is it possible to divert pounds for investment in other countries given that those pounds must, necessarily, be spent in the UK?
Thirdly, more taxes on banks. Yes definitely, starting with not paying interest on reserves.
Fourthly, there may be an issue about large sources of funding. For some projects a lot of money is required which the finance sector does currently organise (beneficially or not is a separate question). There may be a case for national investment, perhaps providing low cost capital to regional banks for industrial investment as in Germany.
Withdrawing a subsidy – which surely the payment of interest to the banks on government-created money, is not ‘taxing’ banks. It’s merely withdrawing a subsidy<p>
I follow your point that there is no such thing as taxpayers’ money. Tax paid doesn’t finance pensions, or the NHS. It seems to me that this removes any sense of involvement with this sort of finance from the average person; they must simply assent to what the govt/Treasury does. People paying tax genuinely feel that this gives them some rights in what the govt does. For example, if you have paid NI for the requisite no. of years, this gives you a right to a pension. They are wrong. So what sort of involvement could replace it?
The ballot box is the only thing that gives people that right.
They never set tax rates.
Only decent politics – of care – can replace this
Hello Richard.
After reading this post I had a look at the glossary. I re-read the entry for ‘private equity’. I had a look for an entry for ‘hedge fund’, as I don’t really know what that is, but there isn’t one, unfortunately. I wondered a bit about these and banks, ‘The City’, and accounting. I concluded that, although all these have both direct, and indirect, influence on my life and wellbeing, throughout my entire life, I hardly know anything about them. It seems to me, a bit odd to know very little about something so influential on life. Actually, it’s probably pretty common.
Is there a bit of a connected web between these entities, and banks, accountancy and other financial entities that I probably don’t even know exist? I don’t just mean they do business with each other but are the same actors present in different sectors? I imagine they are.
This is a bit of a rambling reply. Rambling in this instance shows a lack of understanding but hopefully also leads to questioning, answers and clarity.
All noted.
I will see what I can do….
Thank you, both.
@ Gordon: Quick and dirty / simplified summary.
Banks take deposits, make loans and make payments. Usually based in the City.
Hedge funds: Short-term investors. Often based in Mayfair. Often funded by pension and insurance funds, aka dumb money, and banks.
Private equity: Longer term investors, aka asset strippers, but no less evil than hedge funds. Often based in Mayfair. Often funded by pension and insurance funds, aka dumb money, and banks.
Accountancy: I will leave to Richard, but add that these firms often facilitate (dodgy dealing by) the above, provide advisors and even board members to the above and regulators (see John Griffith-Jones). See also law firms (see Hector Sants).
There are revolving doors in that eco-system (see John Griffith-Jones, Hector Sants, Howard Davies, Victoria Saporta, Mervyn King, Nigel Lawson, George Osborne, David Cameron, Peter Mandelson etc).
The above is a simplification of that dodgy eco-system.
I suggest that in any political climate its possibly unwise to issue the sort of direct challenge this announcement represents.
In the current climate of ‘Patriotism’ why isnt Farage et al making hay out of it ‘UK Governments threatened by evil banks/Bond Markets etc’?