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.