IT IS NOW almost six years since the UK voted to leave the EU and two years since our formal withdrawal. One will recall that ‘The City’ was one of the key battle grounds during the referendum campaign with a near consensus (Global Britain and a few other key authors excepted) that a vote to leave would be a disaster for financial services in general and the City in particular.
The Remain side was right in one respect. The City really does matter to the UK economy. As a recap financial services is perhaps the UK’s most important private sector asset generating some £161.4bn of Gross Value Added (GVA) to the UK economy in 2021 with over £60bn of exports. This represents around one twelfth of the entire UK output. When one considers that financial services accounts for only around 3% of all employment this is quite an extraordinary feat.
Moreover, of the approximately one million one hundred thousand employees perhaps only 300-350,000 are employed in what might be called ‘high finance.’ This sector generates directly £75bn in tax revenues and substantially more if ancillary services are included. Thus we can all agree financial services, love them or loath them, is critically important to the wealth of the nation.
We must, however, also recap almost all the major investment banks, consultancies and the vast majority of politicians argued leaving would lead to a wholesale 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 doom mongering PwC argued in April 2016 that a vote to leave would result in 70-100,000 jobs migrating to the EU by 2020 as a direct result of a leave vote.
Our sister think tank, Global Britain, argued this was hogwash. We believed the greatest threat to the City of London was remaining in the EU as their regulation-heavy mercantilist approach would actually undermine the City’s competitive advantage over time, strangling the UK’s opportunity globally.
We argued that London’s dominance was more a result of a long-held global competitive advantage based round London’s unique global position, the myriad of associated trades and services that provide the microsystem for growth, coupled with the UK’s perception as a safe haven with relatively low and stable tax and security of property rights. On top of that, recreating skill clusters elsewhere, or even capital pool depth was no easy task. The barriers to entry were thus high and the EU misunderstood the root cause of the UK’s financial service strength and the ability of others to replicate it.
So, what’s happened since the Referendum? Well the City has not only consolidated its European position but remains nip and tuck with New York as the global number one.
Indeed, as outlined in the Global Financial Centre Index, only one other European centre, Paris, even makes the global top 10 and that is at 10th! Next up is Frankfurt at 14th and Amsterdam at 17th. London has no serious challenger and frankly none look like to emerge as the EU remains convinced regulation and control is the route map to success. In this it is deluded.
While a challenge from the EU looks highly unlikely, however, particularly given the multiple challenges the Eurozone faces, London needs to be careful. Firstly, Brexit offers a huge opportunity for regulatory divergence. Yet, beyond repeating past commitments to liberalise, so far there has been little that’s tangible in terms of cutting expensive and needless regulation, from MiFID2 to capital adequacy rules to name but two. Words are not enough; we need to see evidence of action.
Secondly, and perhaps more seriously, the UK’s reputation as a low tax and stable jurisdiction has been severely undermined. Taxes are now at a 70-year high and are converging not with Singapore but with the EU. This is seriously undermining the UK’s attractiveness, not least the substantial rise in Corporation Tax. Ultimately it risks being counter-productive.
A third significant risk is the undermining of property rights and even the rule of law. Increasingly regulation is retrospective and often looks arbitrary as HMG scrambles for short term political fix over long term strategic advantage. While the UK has not been alone in sanctioning sovereign assets this will not go unnoticed globally and will undoubtedly undermine confidence 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 over Western ones. There has been no debate about the wisdom of this. A restatement of a commitment to property rights would be helpful.
Equally, endless tangential regulation from woke directives, to net zero interference with free market decisions, also come with a very high price. We are moving a long way from free markets as Environmental, Social and Governance (ESG) takes centre stage, literally, over economic imperative.
Our economy and that of most western nations is more challenged than at any time since the 1970’s – continually weakened by expedient and short term policy response. Monetary extremism and near zero interest rates, massive and largely unproductive government fiscal spending, heavy touch regulation and net zero, lockdown and now sanctioning Russia have seriously undermined the very foundations of Western economies. The City has weathered this well so far and certainly done rather better than our EU rivals confounding our Remainer 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 it, we need lighter and more sensible regulation which will bolster UK comparative advantage and we urgently need to reverse these highly damaging tax increases. We need to see divergence as an opportunity, not a threat.
The City has the building blocks to be the undisputed global leader, but which politician will stand up for it?
Ewen Stewart is a City economist whose career has spanned over 30 years. He is director of Global Britain and a co-founder of Brexit-Watch.org.