The good news is that Alistair Darling saved the economy on Wednesday. The bad news is that he saved the wrong economy.
Switzerland, Luxembourg, Ireland and Hong Kong will all be quietly celebrating as they look forward to welcoming a second influx of bankers and financial institutions, after the first wave of tax exiles from London sent by Mr Darling’s previous Budgets and mini-Budgets. Many British voters will, of course, be delighted about this relocation of greedy casino-bankers — almost as delighted, in fact, as the burghers of Zurich will be to receive them.
But as taxpayers, consumers of public services and employees in the many industries dependent on overpaid bankers, the citizens of Britain should be less pleased. There are likely to be serious consequences from what can be fairly described as the all-out war being waged by the Government against the banks.
To put this war in the proper perspective, consider three figures mentioned by the Chancellor on Wednesday. The first is the estimated yield of £550 million from the bank windfall tax. The second is the direct contribution of financial companies to Britain’s tax revenues, which amounts to 25 per cent of the total yield from corporation tax or £11 billion a year. This excludes the much larger sums paid by their employees in income tax, stamp duty, VAT — a number that must run into many tens of billions a year.
The third figure was the most surprising, although it received little attention. This was that the estimated final cost to the Treasury of all the bank bailouts since the collapse of Northern Rock will be £10 billion. This projection has been slashed from the £50 billion figure in the March Budget, and Mr Darling predicted that the Treasury would eventually eliminate even this and also recoup what it spent on banking advice, accountancy and so on during the post-Lehman panic. This optimistic-sounding forecast actually seems much more plausible than most of the other projections published by the Treasury this week.
The upshot is that the Treasury is risking serious damage to a leading British industry in pursuit of a one-off benefit worth only £550 million. The special bonus tax is not, of course, a simple revenue-raising measure, but a punishment. But the question is whether the costs of administering it outweigh any possible benefit. Starting with the costs, there are two. The first is the short-term risk that an exodus of highly paid bankers will prolong the recession and deepen the hole in the public finances.
The second is the damage if Britain turns its back on the industry in which our economy has the clearest comparative advantage. This will be particularly serious if finance recovers to become one of the most profitable sectors of the global economy. It will be catastrophic if no other industries develop into global leaders to replace the jobs and incomes that will be lost. So far, there has been no evidence of such new industries arising, suggesting that, at a minimum, the loss of Britain’s global leadership in finance will require the pound to be devalued much more drastically, making us much poorer in relation to other advanced economies.
To worry about such damage, we do not have to assume that any big banks will leave London entirely — obviously they will not. It will be sufficient for significant numbers of highly paid employees to relocate. Given that most of these bankers are not British and are working on deals outside Britain with clients from outside Britain, it is plausible that a significant proportion, say a fifth, will agree with their bosses that they could do their jobs just as efficiently in Switzerland, Luxembourg or Hong Kong. And losing 20 per cent of Britain’s high-end banking activity, along with the related spending, would mean a hit to the London economy comparable to the one that it sustained after Lehman.
Now what about the benefit of punishing banks? Whatever damage this might do to Britain’s prospects, surely it is necessary, given the enormous financial losses inflicted by bankers’ misjudgments and sins? Yes, but only if the losses really are as disastrous as they first appeared.
We now know, however, that the direct taxpayer losses resulting from the crisis will be modest, probably non-existent. This does not mean that the losses of the banks have been non-existent. Far from it. They really did lose several hundred billion pounds, but all these losses have fallen where they should have: on shareholders. They certainly have a legitimate grievance against the incompetent directors who allowed incompetent bankers to ruin these institutions and overpaid them for it.
But why should the Government get between shareholders and bankers in this punitive process? There are two possible answers. The first is obvious. The Government is now the main shareholder in Britain’s two biggest domestic banks, Lloyds and Royal Bank of Scotland. In these two, it should clearly exercise its duties as a shareholder and insist on tough compensation guidelines, sacking any board directors who disagree. In other banks, however, the Government’s punitive role has to be justified by broader considerations. Even if the Treasury ends up making a profit from its direct support for the banks, last year’s financial crisis put millions out of work and caused a near-doubling of public debt. Surely, punitive measures are needed to prevent similar disasters in future?
This would be true if bankers were really responsible for this damage. But another possibility becomes more plausible as asset prices recover and it becomes clear that the original estimates of banking losses were gross exaggerations. The narrowing losses suggest that the banking crisis did much less damage to the wider economy than the chaos created by panicking regulators, misguided accountants and politicians who were too slow to realise that markets forces had failed and robust government intervention was required.
If, for example, the British Government had moved much faster to guarantee the British financial system and recapitalise the weakest banks, as it did in 2007 after the run on Northern Rock, most of the mayhem that followed Lehman might have been avoided in Britain.
If the US Government had abandoned its market fundamentalist ideology and recognised the need to guarantee the entire banking system, instead of forcing Lehman into bankruptcy, the global recession might never have happened.
If you want to blame someone for the global catastrophe that followed the collapse of Lehman, stop obsessing about bankers and focus on the real culprits: Henry Paulson and George W. Bush.
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