AT last, some facts to enlighten a debate mired in hysteria, demagoguery and ignorance. The much-maligned financial services industry contributed an estimated £53.4bn to UK government taxes in the 2009/10 financial year, 11.2 per cent of the total UK tax take, according to a report today from the City of London Corporation. The banks are the biggest taxpayers within the overall finance industry. Without the City, therefore, the UK would be sunk, the budget deficit even larger than it already is and the spending cuts required to tackle years of government over-spending even greater.
These refreshing facts follow Wednesday’s report from the National Audit Office, which said that UK taxpayers would likely suffer “no overall loss” from the banking rescue, including the equity stakes in RBS, Lloyds and Northern Rock, various guarantees and the Special Liquidity Scheme. Interest on the gilts issued to fund the help to the banks is being covered by the fees charged.
This does not excuse stupid actions during the bubble, and this newspaper has long expressed its outrage at the way some institutions were bailed out, even if taxpayers end up making a profit on their stakes, as is now likely. But it does mean that critics who allege that finance firms are of no benefit to the UK are talking dangerous nonsense – as are those who believe that it is the bailouts that sent the deficit and national debt soaring.
The industry’s total tax take fell £8bn last year due to the downturn but it overtook North Sea energy to become the top payer of corporation tax. Finance employed over 1m workers, generating £24.5bn in employment taxes. This would have been even higher had the sector not lost 91,000 employees (7.9 per cent of the total). Average pay in the sector was £71,236 and employment taxes per employee £40,481 (including all national insurance contributions). Those cheering whenever bankers are sacked should understand that one job loss in finance entails close to two job losses in the public sector.
It is in the UK’s interest to have a thriving financial industry – just as it is to grow as many other industries as possible. But it is equally imperative that the City doesn’t help promote boom and bust or that all of its liabilities end up being underwritten by taxpayers. That is the key issue. There are many who, following the crisis, claimed that banking needs to be reduced to a small share of GDP to make sure the government would never go bust as a result of having to take on the sector’s huge liabilities. That was only true in one way: banks were far too leveraged; their balance sheets had to be cut, which by definition is reducing their size as a share of GDP. But the remainder of that conclusion was based on the wrong premise, which was that bailouts are always necessary in a recession.
Capitalism requires that all bad firms be allowed to go bust, wiping out shareholders, bondholders and staff contracts. Lehman’s disorderly collapse showed that banks are slightly different to other companies because of their inter-connectedness. Special resolution procedures need to be introduced to allow bank failures to take place in a controlled manner, protecting the overall economy. It is a tragedy that such wind-down schemes, now planned by the FSA, were not in place three years ago. For that, regulators, who write bankruptcy law, are entirely to blame.