A clampdown on non-doms. Taking away the tax advantages of private-equity funds. A higher tax on dividends. As the election campaign gets under way, the main political parties are rolling out policies one after another that will directly hurt the City.
When you pause to think about it, that’s very odd. For all its faults, finance is one of our most successful industries. The German parties don’t compete to attack the car industry, or the American ones to attack their film-making or software industries. And yet over here, it’s open season on one of the country’s biggest employers and export-earners.
These attacks will hurt the UK
You don’t have to dig very deeply into any manifesto to see the banker-bashing that is now routine across the political spectrum. The Labour party, not very surprisingly, is way out in front.
The party that under Tony Blair made a conscious effort to woo finance now rarely wastes an opportunity to clobber it. The decision to end the non-dom tax rule is the most obvious example. It may be an anomaly, but getting rid of it could easily hurt the City’s status as a magnate for global talent, as well as reducing the number of foreign billionaires who employ its private bankers, lawyers and wealth managers. But it doesn’t end there.
In clamping down on tax avoidance, Labour is targeting the carried interest schemes used by the private-equity industry to incentivise their staff, despite the fact that London is one of the global hubs of that industry.
It will rewrite the rules on stamp duty so that hedge funds have to pay it, even though London is a key centre for that industry – and, if you have to pay duty on every transaction, you might as well go elsewhere or shut up shop. Taken together, the package will be a huge blow for the City.
But the Lib Dems are not much better. The party that came up with the mansion tax – which should really be renamed “the modest semi in London tax” – plans to raise the tax on dividends, a move that will hit the pension-fund industry very hard. And it wants to lower the threshold for capital gains tax, regardless of the fact that revenues have already gone down since it was raised to 28%.
Even the Tories can’t seem to resist joining in, although the party seems aware that the City actually contributes something to the economy. George Osborne appears to have made the banking levy a permanent part of the government’s finances, and has got hooked on huge fines to fund spending. What other country in the world levies specific taxes on its most successful industry? The French on wine? The South Koreans on electronics? Of course not.
True, the City only has itself to blame. It’s blown its credibility with the voting public, and the politicians are aware of that. The financial crash of 2008, the bail-outs of the banks at vast public expense, the routine bonuses running to hundreds of thousands, the scandals over Libor and rate-rigging: all have come together to make the City toxic in the view of many ordinary people.
The financiers are to blame for our problems, runs the popular view – they’re not part of the solution.
But just because the City may be at fault does not make the attacks right – or, more importantly, sensible. The statistics on the contribution that finance makes to the British economy should hardly need repeating.
We have the fourth-largest banking industry in the world, the third-largest insurance industry, the second-largest fund management industry, and the second-largest legal services sector. Not bad for a relatively small country. It employs 7% of the workforce, and generates 12% of GDP. Get rid of that, and it will be very hard to replace.
The City needs to speak up
The problem is that the City has lost its political voice. A decade ago, the finance industry had strong links within all the political parties. That was most obviously evident in the Conservative party, but it was true of the left-of-centre parties as well. How many senior Labour or Liberal Democrat figures have ever worked in the City? Or Tories, even.
The only front-rank politician with City experience is Nigel Farage. While he is always ready to leap to its defence, he usually mixes it up with some stuff about the EU – yet the real threat right now is from politicians in Westminster, not in Brussels.
That voice needs to be found again – and fast. This is not going to be easy. To start with, the City needs to clean up its act. It needs to make sure there are no more rate-rigging scandals. Bonuses need to be more modest for a period of many years. On the retail side, it needs to make sure that investors are treated fairly and are not ripped off with ridiculous fees.
At the same time, the City needs to step up its involvement in all the main parties, and not just by giving them money.
It needs to put a lot more time and effort into explaining precisely how much finance contributes to the economy, the jobs it creates, and the taxes that are paid on that. If it doesn’t, and doesn’t do it soon, it will end up with policies that will do it a lot of harm – and no one will be better off for that.