UK officialdom appears to believe that if the City of London’s international financial services left the UK it would not matter much to the economy. This is undoubtedly part of the explanation for the current government attack, in terms of both tax and regulation, on the City.

A recent leader in the Financial Times said, ‘Were a bank such as Barclays to shift its headquarters, the impact on the UK would surely be minimal as it would still do much of its business and pay taxes in the country.’ The editor of the Financial Times and his colleagues do not seem to understand an obvious feature of UK financial sector activity. This is that a very high proportion of the output of ‘the City of London ’ – i.e., the high-value-added wholesale activities which generate the controversial large bonuses – results in exports.

In the last 40 years the City has become the world’s main centre for the production of a range of complex risk products which are sold to international business. Contrary to the FT’s leader, the departure of these financial services activities from the UK would be a national catastrophe. Such has been their dynamism that in 2008 and 2009 exports of international financial services constituted almost 4% of GDP, and they were worth almost as much as a third of exports of goods.

If excessive tax and regulation now lead to the emigration of City-based financial industries, the UK will need to boost the rest of its exports (i.e., exports of goods and non-City services) by about a quarter to make good the loss. Currency undervaluation would be needed to motivate the transfer of resources from international financial services to other types of export. Given the high productivity in City-based industries, a further result would be a decline in national productivity.

Tim Congdon 154x154

Shadow Monetary Policy Committee

Tim Congdon CBE is an economist and businessman, who has for over 30 years been a strong advocate of sound money and free markets in the UK’s public policy debates. He was a member of the Treasury Panel of Independent Forecasters (the so-called “wise men”) between 1992 and 1997, which advised the Chancellor of the Exchequer on economic policy. He founded Lombard Street Research, one of the City of London’s leading economic research consultancies, in 1989, and was its Managing Director from 1989 to 2001 and its Chief Economist from 2001 to 2005. He has been a visiting professor at the Cardiff Business School and the City University Business School (now the Cass Business School). He was a Visiting Research Fellow at the London School of Economics between 2005 and 2007. He was awarded the CBE for services to economic debate in 1997. His books include Monetarism: an Essay in Definition (London: Centre for Policy Studies, 1978), Monetary Control in Britain (London: Macmillan, 1982), The Debt Threat (Oxford and New York: Blackwell, 1988) and Reflections on Monetarism (Cheltenham: Edward Elgar, 1992). In 2005 the Institute of Economic Affairs published his monograph on Money and Asset Prices in Boom and Bust, and in 2009 it published a further monograph on Central Banking in a Free Society. A collection of papers on Keynes, the Keynesians and Monetarism (Cheltenham: Edward Elgar) appeared in September 2007. His latest book, Money in a Free Society (New York: Encounter Books, 2011), is more specifically a response to the Great Recession. In June 2009 Tim Congdon set up a new economic consultancy, International Monetary Research Ltd., of which he is now chief executive. Tim Congdon was honorary secretary of the Political Economy Club from 1999 to 2010, and is currently chairman of the Freedom Association.