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Posted Saturday 10th December 2011 at 9.38pm
The Matt Roberts economic manifesto
This article by Will Hutton got me thinking some more about the situation Britain finds itself in post-veto, and more generally post-recession.
The government's argument is that if we heavily tax the financial services sector, then the bankers and hedge fund managers will up and leave. And so we have to make a decision: do we want to keep these people, with their big contribution to our tax receipts; or do we want to lose them, because their avarice sets a bad example which damages the moral and economic fabric of the country? The second option is the scarier one, because the downsides of their presence are subtler than the very measurable effect on our GDP (and on the Tories' campaign funds, but that's another story). You will probably not be surprised to hear that I would choose it regardless.
The (supposed) logic behind the coalition's economic policy is that the state has grown so big that it is drowning out the private sector. Cutting back on government spending will, in the long term, actually increase the number of jobs and the amount of money in the economy, as the private sector sees the opportunity to expand, increasing competition and choice for the public. That's the theory, and while the signs are not good so far, it is not clear whether it is the right or the wrong approach to take. What is clear is that it is unintuitive. Sacking people means more people will have jobs? Taking money out of the system means there will be more money in the system? Sounds crazy. Almost as crazy as "driving out some of the financial services sector could increase tax receipts".
France's GDP per capita is either similar to or higher than the UK's (depending on how you measure it), from a similar population size; this despite the fact that there are hundreds of thousands of France's brightest young people working at banks in London. Why is it that the French can manage without this sector, but the British can't?
Learning to cope without the big banks would be a hard road for the UK economy, no doubt. Revenues would certainly drop in the short term. But it might mean that hard work would once again become a prized quality; talented young people might aspire to carve out a successful career, or make their millions from some brilliant innovation, rather than spend a few years working in a bank - a few years which turn into a lifetime.
It might not work. Perhaps a decade of negligible growth would turn into a decade of depression. But we're risking that anyway - no-one knows the right answer, and I'd rather risk it with the potential reward of a balanced economy than just the prospect of a return to the good old days of 2006. The infrastructure in Britain is better than most places in the world, and most places in the world manage without being a centre for the financial behemoths to whom Downing Street panders. So could we.
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Comments
Posted Sunday 11st December 2011 at 10.16am
Rich says:
"Why is it that the French can manage without this sector, but the British can't?"
Tourism and agriculture, I'd guess. France is the most visited country in the world by miles. And they must be in the top three for net agricultural exports.
Is the sentence before that one supposed to say something completely different, or is the number just wrong? Surely there aren't hundreds of thousands of French people working in London banks?
Posted Sunday 11st December 2011 at 11.10am
Matt Roberts says:
I got a bit carried away when I said there were hundreds of thousands of French working in London's banks, sorry! I think I'm right in saying that there are hundreds of thousands of French working in London, but of course only a small minority of those are actually working in banks. The point was that the reason touted for why we can't raise taxes is that there will be a talent drain from the UK - but France already has this kind of problem, and doesn't seem to find it too much of a problem.
You're right, of course, that the UK can't compete with France on tourism or wine production. On the other hand the French work shorter hours and retire at least 5 years earlier than the British. Their population is generally bad at speaking English relative to other countries in Europe, especially the UK. There are areas in which France's economy has advantages over that of the UK, and areas where it has distinct disadvantages. The point is not that the UK should try to emulate France's economy in particular - indeed, as you point out, the warmer climate makes that impossible - but that other countries with similar GDP don't rely so heavily on financial services.
What about Germany, Sweden, the Netherlands, Denmark...? These are not such a good comparison on population size, but better in terms of climate. Each has its own strengths, and there doesn't appear to be any reason why the UK's strength has to be in banking, at least not to the extent that we have to throw away our position in Europe in order to cling onto our status as a world leader in finance.
Posted Wednesday 11st January 2012 at 9.13pm
Matt Roberts says:
Rereading this, I just want to make a couple of points that I think I failed to get across in the main post.
1) I don't think all bankers are greedy.
2) I don't think all bankers should be thrown out of the UK.
What I am saying is that we should tax banks fairly, be that through a "Robin Hood tax", tax on bonuses, higher income tax, property tax... I don't know what the best option is. The Conservative stance seems to be that doing this will cause all the talented bankers to leave.
Of course raising taxes will cause a drop in the volume of banking that goes on on UK shores, and it would be a brave decision to make a move in that direction. But I think the resulting effect is grossly exaggerated, and am arguing that if it's not then we should attempt to do without them regardless.
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