Illusory benefits

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One of the arguments for the deregulation of financial services during the Thatcher era (and largely endorsed by the failure of Blair and Brown to make any attempt to re-regulate) was that these industries were of enormous benefit to the UK economy.  It was an assertion which went largely unchallenged at the time, and there is a danger that it continues to go largely unchallenged as the sector gets back to ‘business as usual’.

But, apart from the obvious problem that financial services are a part of the explanation for the dysfunctional economy of London, and the imbalance between that economy and the economy of the rest of the UK, I think we should be challenging much more critically whether we really benefit to the extent claimed.

The obvious point to make is that although the sector generated huge private profits up to 2007, it did so by creating huge liabilities in the process.  The crisis then led to those liabilities being transferred from those who had incurred them to the state, and thus to all of us as citizens.  In terms of risk and reward, they took the rewards, whilst we ended up carrying the risk.  It’s not a sound basis for an economy.

Secondly, the sector actually created very few jobs, compared to the amounts of money involved – moving money at the press of a few buttons creates fewer jobs by value of turnover than moving widgets coming off the end of a production line.  It will never be the answer to unemployment, particularly in a Welsh context.

Then, there’s the question of tax payments.  It has been claimed that financial services accounts for around 8% of the UK economy, but contributes 25% of corporate taxation to the Treasury.  As far as it goes, that’s true.  But because the sector employs so few people relative to the turnovers involved, the total taxation from the sector – adding together both company taxes and personal taxes paid by employees – comes to more like 7% of the total, marginally less than its ‘fair share’, purely on GDP comparisons, and significantly less than one might expect looking at the overall profitability of the sector.

Yet despite all these obvious questions, the political establishment seems wedded to the belief that expanding financial services, and creating the circumstances for that expansion, is somehow essential to the success of the UK, or Welsh, economy. 

Part of the reason is to do with the way in which the bankers and financiers have influence at the top table.  In 2010, just over 50% of cash donations to the Conservative Party came from companies or individuals in the financial services sector, and both Cameron and Clegg come from that background themselves.  The Coalition’s support for the sector should come as no surprise.

Reasons for the Labour Party’s attachment to the sector are less clear.  Schmoozing with Rothschilds on yachts in the Med may be a factor, but I suspect that the interchange of staff between the sector and the Civil Service, particularly the Treasury, means that advisers to governments – of whatever colour – are incanting a supportive message.  Labour’s rhetoric against boardroom salaries may sound better, but it’s unlikely to go beyond rhetoric, and it is, in any event, fiddling at the fringes.

‘Retail’ financial services – high street banking, insurance etc. – have a vital role to play in our life, and we certainly need to attract more of those to Wales.  And it would be nice if that wasn’t just call centre jobs as well.  But we’re better off without the gamblers and speculators.  And we’d be better off if we could put some distance between them and our real economy as well.