The introduction of a new 50 per cent levy on banks paying bonuses above £25,000 is one of several recent measures – including the incoming 50p tax band and global transaction tax proposal – that have been perceived to be an “attack” on the City.
We all acknowledge the real public anger that exists as a result of the financial crisis, particularly when it comes to bankers’ remuneration. However, an excessively punitive approach towards pay will have a detrimental effect on the UK as a whole. Let me explain why.
The financial services industry contributed an estimated £61.4bn – or 12.1 per cent of total tax revenues – to the government during 2008/09. This – combined with the redistribution of the City’s business rates of around £580m and the industry’s substantial philanthropic contributions – is money that filters down to the wider economy that we cannot afford to lose when faced with a large budget deficit.
According to one report, the total tax rate on bonuses for high-earning bankers could, for some, rise to over 100 per cent in total as a result of this new levy. Such a high marginal rate is bound to make institutions and individuals reconsider their commitment to the City.
Furthermore, this has been described as a one-off measure. But the government added it could, in fact, be repeated next year as part of a broader review of pay levels. Such uncertainty only serves to undermine the UK as a place to do business in the eyes of foreign investors and banks.
Industry figures are constantly challenged to prove that institutions and talent will move abroad as a result of higher taxation. But by the time we have that proof it will be too late – key business activities and staff will have already left. This would further exacerbate the skills shortage that is already problematic for the UK as a whole. Yet the financial services sector will be crucial to a speedy recovery from recession.
We are happy to compete with rival global financial centres – but such competition must take place on a level playing field. Writing in The Prime Minister and President Sarkozy declared last week: “it is clear that the action must be taken at a global level. No territory can be expected to or be able to act on their own”.
And yet this seems to be where the government is heading at the moment when it comes to bankers’ remuneration. We need much clearer evidence that other major financial centres, especially in the West, will implement similar measures. If other governments act in accord with the G20 principles we need not fear the exodus of talent that would inevitably follow if the UK acts alone.
Sadly, it would seem that the trust between politicians and some parts of the City has been severely dented. I am keen to do my part in restoring that trust.
Nick Anstee is Lord Mayor of the City of London