Not so long ago, the headline of one tabloid newspaper proclaimed – London; capital of the world. Whether you believe London deserves that accolade, one thing is for sure, the city brings in a huge amount of readies to the UK. It also brings in a huge array of talent from abroad – just stand by Liverpool Street Station and observe the Armani suits and hear the foreign accents.
But of late, the shiny veneer of London has suffered a couple of nasty blotches. First there was Northern Rock, when the UK suffered its first run on a bank since Queen Victoria was on the throne; then there was Alistair Darling’s decision to impose a £30,000 tax charge on the non-domiciled residents of these shores.
Do either of those things matter? Yesterday, the latest Global Financial Centres Index, was published. The good news, London is still number one; the bad news, it’s lost marks, and London’s lead over New York has narrowed over the last 12 months.
Is this just a temporary slide? Who is to blame? But in the long-term, is the success enjoyed by London a good, or a bad thing?
The Global Financial Centres Index is produced after taking into account performance in five key areas: people, business environment, market access, infrastructure and general competitiveness. And maybe the champagne bars of London should be busy, as revellers celebrate the news that the UK’s capital tops all five categories across the world.
But, drill down a little, and look at sub-sectors, and the first blot is revealed. New York has overtaken London in the Banking Sub-Index.
In fact, overall, London amassed a score of 795 points. Okay, that doesn’t mean much. But to put this score into perspective, last year it rattled up 806 points, so it lost a little ground. Its lead over New York narrowed slightly, with the Big Apple seeing its score fall by one point to 786. So actually, London’s lead has fallen from 19 to 9 points. So, really, the two cities are pretty close.
But there is a big gap between number two and number three on the list. Hong Kong scored 100 points less than London. The rest of the top ten was made up of Singapore, Zurich, Frankfurt, Geneva, Chicago, Tokyo and Sidney, in order. Just 60 points separated the third and tenth cities on the list.
Okay, we have written about Northern Rock until we were blue in our face – although other publications have given over far more space – so presumably, faces at, say, the BBC are a good deal more blue. But there’s not much that can be done about that particular bank. We are stuck with it.
But, as for the chancellor’s plan to levy a £30,000 charge on non-doms, now that can be changed.
Non-doms are, of course, easy victims. It is so easy to tax them – and let’s face it, for the likes of Roman Abramovich it’s small beer. Or as Vince Cable put it, “Not much more than a round of drinks at half time at Stamford Bridge.” But that is really not the point.
As always with these things, the key really lies with those on the margin. For the majority of non-doms, a £30,000 charge really is a big deal, and could make the difference between them living in London, or somewhere else.
According to a recent Treasury paper, “Non-domiciled residents contribute some £12 billion to GDP and £4 billion to income tax alone.” So, there’s a danger that if too many non-doms leave the UK, we may actually see tax revenue fall. Bear in mind that the Treasury reckons the tax change will bring in around £350m next year. So that’s not much return for a potentially heavy loss.
Yesterday, the CBI said it feared, “The UK will see foreign talent and capital head home or to more attractive countries along with much goodwill towards the country. “
CBI director general Richard Lambert said, “The rushed and confused approach to this legislation, which appears to be driven by political and fiscal needs rather than policy principles, has been greatly damaging.
“Confidence in the UK as a country which does not spring nasty surprises has been undermined, while the rushed approach has forced those affected to make decisions on the basis of confused proposals.
“The draft proposals have been bedevilled by problems and despite attempts to clarify some aspects there are still a plethora of outstanding issues which need to be resolved before any changes become law.“
It all seems to boil down to that week, soon after Gordon became PM, when the Government did a wobble. First it was going to apparently call an election, then it changed its mind, and then it appeared to try and steal Tory policy. The opinion polls said we were not impressed.
Ironically, though, the tax change that has created all this criticism, is not dissimilar to the change the Tories proposed.
Even so, it still puts Alistair Darling in an awful light. He panicked, after the Government had enjoyed 10 years in office; he suddenly appeared to rush out ill-thought through plans to change tax, which have since come back to haunt him.
However, in criticising the City, it does seem that actually the Global Financial Centres Index, just like the men and women who make up the City, might be wrong in one important respect. It referred in a positive light to the response of the US in general to the global liquidity shock.
The Fed is of course cutting the interest rate at an extraordinary pace. This may help the US avoid recession, but in the longer-term, it seems difficult to believe that such huge cuts in interest rates at a time of rising inflation can do anything but huge harm.
The City may yet benefit from Mervyn King’s more circumspect approach to the credit crunch.
But maybe we should be asking a bigger question.
If London can maintain its position as the financial capital of the world, and at the same time the global economy maintains its growth, then London will bring in even more money for the UK. It will become even more important to the UK. That is a good thing, surely.
Well, yes it is, but there is a danger.
If the City’s success can continue while the global economy expands, so that London becomes the hub of a thriving and dynamic global financial market place, then this could in turn force up the value of sterling.
This could create what’s called the Dutch disease – so named after businesses in Holland found it harder to compete after North sea oil revenue pushed up the value of the guilder. The UK could become too reliant on the City.
Last week we told how there is evidence that the UK is suffering from a brain drain – with talent leaving the UK to live abroad. The scenario described above, in which the UK becomes more reliant on the City, could make this trend even more extreme. That may not matter if the City is pulling in even more talent, but the danger is this. We could be putting all our eggs in one basket.
And who is to say, that in an era in which presumably the Internet will become even more important, this could in turn mean the geographical location of London is less important. It may be less important for financial specialists to work and live near each other.
That is not so say the Internet will definitely cancel out London’s advantages. But it may be that even in the Internet era, the advantages of having a local pool of talent, eating, breathing and drinking near each other and then feeding off each other’s ideas and dynamism, could make a permanent advantage for London. But, it may not, and that’s why relying too much on the City is a risky strategy.
At the very least, the tax revenue should be invested, providing the UK with diversification, saved away for times when things might not be so good. This is of course the opposite of what is happening.
Yesterday, we told how PricewaterhouseCoopers reckons we squandered the billions from North Sea oil. That right now, we could be sitting on a sovereign wealth fund worth £450bn, bigger than the funds in Russia, Kuwait and Qatar combined.
Moving forward, we may have an even greater opportunity to build upon the City’s success and create an even larger sovereign wealth fund – we must not squander it – because, just like North Sea oil, London’s pavements of gold may run out.
