Ever since Shakespeare conceived Shylock in 1600, banking has been a profession that it’s fine to vilify in the UK. The pendulum was always hanging closer to hate than to love and it swung violently towards the former after the financial crisis of 2008. If anyone reviles bankers in the 21st century’s adolescence, it is the Britons, who overwhelmingly supported a cap on banker pay in 2009 and were encouraged to blame bankers for the austerity of the Cameron government.
Now though, following the result to the EU referendum, there’s a chance that the hated bankers might actually do it. – They might actually leave the country or lose their jobs. “Good riddance,” say the Britons (except in language a little more colourful), as they think about launching their own government funded regional investment bank instead.
Except that when those bankers are gone, they’re likely to be missed. Among those who work in finance, there’s already a degree of anticipatory schadenfreude for the upset that will be caused by their departure. Before Britain throws its bankers to MiFID II and does away with passporting to regain control of immigration, it’s therefore worth pausing to think of the benefits bankers have brought to Britain. And of what might happen if some of them disappeared.
1. The jobs
For all that they are insecure, banking jobs in the City of London are also some of the best paid in the British economy. It’s not just the 2,000 people earning more than €1m, it’s also that the general level of pay is higher in the City elsewhere. Witness the charts below, from the UK’s Office of National Statistics: average full time pay in the City of London is 70% higher than in Britain’s second city. The CityUK calculates that 722,000 people work in financial services in London and that 2.2m work in financial services in the country as a whole.
Can the country really do without those jobs? In other industries, six figures are hard to come by: the Guardian’s jobs site ostensibly has 253 jobs paying £100k+, but a closer look reveals that they’re mostly graduate-level commission-based roles for recruitment consultants…
2. The output
In 2014, TheCityUK calculates that ‘financial and related professional services’ contributed £190bn to the UK economy. A study for the House of Commons in 2015 found that around around 8% of the UK’s total gross value added (and around 20% of London’s) came from financial services. As the chart below shows, the UK is less reliant on financial services as a country than Luxembourg, but it’s a lot more reliant on financial services than France and Germany.
An investigation by the Bank of England found that the UK financial services sector has tended to grow faster than the rest of the economy over the past 100 years. Between 1856 and 2010, the average annual growth rate for gross value added in financial services was 4.2%, compared to 2% for the rest of the economy.
3. The multiplier effect
The benefits of the financial services industry are not restricted to finance itself. In 2013 PWC calculated that for every 0.2% growth in GDP and additional 47,000 jobs generated by the financial services industry in the UK each year, the wider economy would benefit from 2-3% cumulative growth by 2020 and an additional 265,000 non-finance jobs.
4. The power of London
The OECD estimates that 20% of London’s gross value added comes directly from financial services – to say nothing of all related industries. The Centre for Cities claims that London generates nearly 30% of the UK’s tax-take.
Across UK cities as a whole, the Centre for Cities estimates that the average amount of tax generated per job was £19k in 2014/15. The City of London itself calculated that employment taxes per job in financial services were £27k in 2013 – around 42% higher than average.
Source: City of London Corporation
5. The Income tax and National Insurance take
In 2015, The City of London calculated that employees in financial services paid a total of £22bn in income tax and national insurance combined. Finance firms themselves paid an additional £8bn, bringing the total employment-related taxes paid by the sector to £30bn.
In 2015-2016, total PAYE income tax in the UK was £146bn and total national insurance contributions were £113bn. The financial services sector pays around 11% of the country’s income tax and NICs, therefore.
6. The Corporation tax take
The financial services sector is also a big payer of corporation tax – more than manufacturing, distribution, or North Sea oil. From the 1st of January 2016, a new UK surcharge of 8% on the profits of financial companies promises to hike the tax take further.
Source: City of London Corporation
7. The pensions hole
The UK has a huge pensions funding hole of £900bn. This is a legacy of underfunded pension schemes and of a tendency to use “early retirement” as a means of making people redundant in the 1980s and 1990s. With a budget deficit that’s already large by historical standards and an ageing population in which 24% of people of working age haven’t even started saving for retirement, the UK is all set up for a pensions nightmare sometime in the next decade.
Here, the City of London should be able to help – and not just with tax contributions. The UK’s pensions industry is the second largest in the world, with investments of £2.1 trillion at the end of 2014 according to the CityUK.
8. The productivity gap
Britain as a whole suffers from a productivity problem. However, our research suggests that finance professionals in London are more productive than the rest. It helps that the UK’s finance sector has been a magnet for academically brilliant students from across the world. “Finance has drawn to itself a disproportionate share of highly skilled people,” noted Adair Turner, banker, author and former chairman of the FCA. “Finance has become, in a way that it was not in the 1950s and 1960s, the predominant choice of destination for top graduates from elite universities and business schools.”
9. The real economy’s funding needs
Much as bankers are reviled for being ‘parasitical gamblers’, finance actually plays a valuable role in society. “Finance supports the mobilization and allocation of capital,” notes Adair Turner in his book ‘Between Debt and the Devil’. Finance enables, “entrepreneurs or businesses with ideas and investment projects to attract capital from savers,” he adds. Martin Wolf, the Financial Times’ columnist puts it another way in his book Fixing Global Finance: “Finance provides a mechanism for shifting resources from those who own them but cannot use them productively to those who can use them but do not own them.”
In this sense, finance should be democratizing. Without finance and capital markets, entrepreneurs would need to reply on the state or wealthy friends and family for funding. In other words, ‘crony capitalism.’
Source: Bank of England
10. The current account deficit
The UK also needs its banking industry to finance its imported goods habit. As Barclays’ analysts notes, the UK’s current account deficit is, “high by historical and international standards, with financing reliant on foreign inflows.”
In the first quarter of 2016, the UK’s current account deficit was 6.9% of GDP, marginally lower than its record high of 7.2% of GDP at the end of 2015, but still very, very high.
Source: Bank of England
While the UK’s current account deficit as a whole is huge, the UK’s financial services industry generates a significant trade surplus and brings in a significant amount of foreign direct investment. Without finance, in other words, the UK’s overall trade deficit would be even higher and the UK even more susceptible to a funding crisis. “Persistent falls in capital inflows would be associated with further downward pressure on the exchange rate and tighter funding conditions for UK borrowers,” notes the Bank of England in its recent stability report. Without a strong financial services industry, the UK would have a lower pound and higher interest rates.
11. The education sector
The UK’s financial services industry is about more than the City of London itself. Over time, PWC’s calculations suggest that every new finance job generates 0.8 jobs in other sectors. Many of these jobs are in education. A current count suggests there are 118 Masters in Finance courses run by universities in the UK. Will these still exist in 10 years time?
12. The low interest rates
With UK interest rates at historic lows and the Bank of England unlikely to rise them anytime soon, the finance industry’s contribution to a low rate economy may seem unimportant. However, as the Bank of England notes in its stability report, the UK is susceptible to a current account funding crisis which could push domestic interest rates higher. Absent the contribution of the financial services industry, this would become more likely.
A separate study suggested that integrated global financial markets have led to lower global real interest rates by redistrbuting excess savings from China.
13. The cosmopolitanism
Without financial services, London would be far more British. As think-tank New Financial notes 11% of the 330,000 people working in the City of London are non-UK EU nationals. Hedge funds employ a lot of French and Italians and private equity funds employ a lot of Germans. Our own research suggests that non-Britons account for nearly half of all employees in front office banking jobs like M&A and research.
14. The outflow of entrepreneurs
Like it or not, financial services is not always a long-term career. The industry is prone to mass redundancies and has had a historic aversion to employing people beyond the age of 45.
While this is bad news for anyone planning to make a long term career in banking, it’s good news for the rest of the economy: finance emits a steady flow of highly-skilled, highly-intelligent, incredibly hard-working people who want to become entrepreneurs. They don’t always succeed, but at least they try (and often spend their life savings and accumulated bonuses in the process).
15. The housing market
If you can’t afford to buy or rent a house in the UK, your sympathy for high-earning individuals who’ve helped buoy the average London house price to £636k is likely to be minimal.
If you already own your own house in London, however, you might want to hope that London’s finance industry persists. Analysts at SocGen are predicting that London’s residential property prices could fall by as much as 30% as, “some companies will almost certainly have to relocate parts of their business to retain access to the EU single market.”
16. The suppression of hedge fund egos
While banks may need to leave the UK to maintain access to the European market, hedge funds are looking secure in Mayfair after the European Securities and Markets Authority issued a statement this week saying that hedge funds and private equity firms based in some overseas markets should be allowed to operate across the EU.
Bankers may be an irritation in London, but in their absence unfettered hedge fund managers would likely be worse.
17. The global relevance
The City of London is the world’s top financial centre and helps make the country globally relevant. OK, the UK also has world leading creative industries, but they contribute a mere £71bn to the UK economy compared to banking’s £190bn.
18. The charitable donations
London as a whole gives nearly £6bn a year to charity. Goldman Sachs alone gave away £17m last year. Sites like JustGiving are dotted with individual bankers donating thousands to good causes. There would be less of that.
19. The arts
20. The emotional release
Finally, bankers offer Britons a release. Can’t afford a house? Blame bankers. Can’t access the public services you need? Blame bankers. Can’t afford to retire? Blame bankers.
When – and if – Britain’s banking industry has been diminished, the country will need to find a new whipping boy instead.