City of London Economic Research

Total Tax Contribution of UK Financial Services

By Janet Kerr, senior manager in the Total Tax Contribution team

The contribution of the UK financial services sector to the public finances

£65bn.  That’s the estimated amount paid by the UK financial services sector (banks, insurance companies, and other financial companies) into the public finances in the year to March 2013.  The total is made up of twenty different taxes borne and collected by these companies.  Corporation tax, the tax that is often front of mind when thinking about the contribution of large corporates is £6.5bn, 10% of the total.

These are some of the findings in a report released today by the City of London on the Total Tax Contribution of the UK financial services sector.  

The largest taxes borne and collected by the sector are employment taxes (income tax and national insurance).   For anyone with children reaching the end of formal education, you’ll know, like me, that the job market in the current environment is tough.  This sector employs 1.1 million people and estimated employment taxes are £28.4bn, that’s 12% of Government receipts from employment tax in the UK. 

Corporation tax borne, which is often the subject of media debate and public scrutiny, is the third largest tax borne on average for the study participants, after employers national insurance and value added tax which is a cost to the business.

The study findings highlight the importance of looking at the Total Tax Contribution to understand the contribution in taxes borne and collected of the UK financial services sector.  

Janet Kerr, is a senior manager in the Total Tax Contribution team and co-author of the study report.

The full research report can be downloaded from the City of London Website.

From local to global - building a modern financial centre

How do local financial centres develop from serving domestic markets to being international financial hubs? 

The development of financial centres is of interest to policy makers and businesses around the world. From the establishment of basic market infrastructure in frontier countries, to centres that become multidisciplinary global hubs attracting investment from around the world, financial centre capabilities provide significant benefits for a country's economic growth.

Our research identifies four key stages in development, and outlines the key characteristics of centres at each stage. The film below shows the typical process of growth.  

The full research report can be downloaded from the City of London website.

 

The City in Europe Debate

Ahead of a potential referendum on the UK’s membership of the European Union, politicians and business leaders gathered in Guildhall this month to debate whether a UK exit would be beneficial or damaging for the City. Despite some claims that the UK’s EU membership is of little interest to the majority of voters, almost a thousand Londoners listened and contributed to the discussion, which considered an issue crucial to the UK’s economic and political future. A link to the full debate is available at the bottom of this post.

UK access to the Single Market was identified by the Lord Mayor as an important advantage for UK financial and professional services, and remained a key theme of the debate, with Vince Cable and Sir Martin Sorrell highlighting EU membership as a key determinant of the UK’s position as the third largest inward investment recipient, and 60% of senior decision-makers locating here to access this important market. The Japanese government’s submission to the UK’s Balance of Competences review made it clear that leaving the EU would put the 130,000 UK jobs created through Japanese FDI at risk.

Our EU membership also facilitates UK trade internationally; free trade agreements with over 37 countries, including important emerging markets like Mexico and South Korea, have reduced global barriers to trade, and the current negotiation of a US-EU trade deal could boost the UK economy by £10bn.

Of course there are two sides to every debate, and supporters of EU exit Jesse Norman MP and entrepreneur Luke Johnson argued London’s development as an international financial centre, attributed to factors like its time zone, talented labour pool and stable legal framework, has not been dependent on EU membership. Norway and Switzerland were cited as examples of countries which have prospered outside of the EU, although as our research into Switzerland’s engagement with the EU showed, the country achieves access to the Single Market through a complex set of bi-lateral trade agreements and significant financial contribution.

EU-level regulation does present challenges for the UK’s financial services industry and the wider economy, particularly bonus cap regulation and the financial transaction tax, with our latest research estimating the tax would increase the cost of finance for UK businesses, and create an additional cost on UK government borrowing of almost £4bn. Despite not signing up to the tax, non-participating Member States are likely to suffer higher costs than those 11 Member States who have signed up, and the legality of the tax’s extra-territorial impacts is currently being challenged by EU lawyers. We’re also looking at how the tax will affect households and consumers across the EU in upcoming research.

However as Vicky Pryce argued, in order to maintain the competitiveness of the financial services industry and its key contribution to the UK economy (valued at over £132bn or 9.8% of total GDP by our latest figures), it’s important the City and the UK continues to engage in EU policy-making, rather than seeking to withdraw altogether. Closing the debate, the Chairman of Policy and Resources Mark Boleat, reflected on the government’s continued success in seeking UK-appropriate implementation of EU directives, and this week the Treasury announced that it would challenge EU bonus caps in view of stringent pay rules already imposed by the Prudential Regulation Authority and the Financial Conduct Authority.

As a key voice in the debate around the UK’s engagement with the EU, the City of London plays an important role through working in partnership with organisations like the Evening Standard and Centre for London, and acting as a host for informed discussion on issues affecting the City and the UK’s financial and professional services.

We also commission independent research to inform and support our work on the EU and financial services regulation, as part of our wider research programme. If you’re interested in finding out more please visit the City of London's economic research page.

To watch the debate in full visit the ‘The City in Europe’ page.

London’s air connectivity: the debate continues

As the on-going debate into increasing UK aviation capacity continued last week there were several key announcements, which will be considered by the Davies Commission, set up in September 2012 to chair the debate and come up with recommendations on how best to expand airport capacity and support UK economic growth. The Commission is gathering evidence about current and future airport capacity and all the factors that affect this and has asked for submissions on proposals for future capacity.

• Heathrow submitted their plans for expansion – this includes a new runway by 2029 in order to operate 740,000 flights a year - up from the current limit of 480,000.
• The Mayor of London, Boris Johnson, announced three proposals to increase UK aviation capacity: a new hub airport in either the Isle of Grain or the Thames Estuary and also the expansion of Stansted airport.  
• Gatwick submitted its proposals for a second runway to act as part of a constellation of three major airports surrounding London.

The Davies Commission expects to report on existing capacity in Dec 2013, including recommendations for immediate actions over the next five years to improve existing capacity, and to report on new capacity following the 2015 elections. Whichever option they choose to take forward, the business City has an interest: air services continue to be of critical importance to the functioning of the City economy. The City is increasingly global in its operations, with a particular need for improved air links with expanding economies such as Latin America. This drives a need for additional airport capacity to ensure that London can continue to offer the high level of connectivity with the rest of the world that is critical for future economic success.

The City of London has commissioned and published several reports on aviation – the 2008 report 'Aviation services and the City' which concluded that there was business support for a third runway at Heathrow. An update to this piece in 2011 looked at the implications of changes in policy since the last study, notably the abandonment of plans for a third runway at Heathrow and a second runway at Stansted.

Our latest research in 2012, included a report on London’s connectivity to emerging and growth markets - examining London’s connectivity by air to twenty two growth and emerging markets, (shown in this infographic highlighting the links) and compared this provision with four other primary European air travel hubs (Amsterdam, Frankfurt, Madrid and Paris) and with another growing global hub, Dubai.  And a second piece, concentrated on the importance of London having hub capacity in maintaining connectivity by air to key business markets, focusing on the extent to which hub connecting traffic underpins the provision of services in London to twenty key business centres.

Our analysis provides evidence that hubbing is a factor in securing a wider route network than would otherwise be possible. It further suggests that the conditions for some airlines to enhance the range and frequency of connections are to a large extent dependent on being able to retain a range of feeder connections at a hub and this has been significant in supporting the development of services to emerging business centres in India and Latin America. Feeder traffic from the UK, Europe, US and the rest of the world is critical to sustaining these services.

The debate on London’s airport capacity will continue up to and beyond the reporting of the Davies Commission, but it will be critical to find long-term solutions for air capacity that will maintain London’s and the UK’s  competitive position.

The reports mentioned in the post above are all available to download from the City of London website:

• ‘London’s air connectivity, 2012 'the importance to London of having world class aviation hubbing capacity’ and 'emerging and growth markets'
• Aviation services and the City, 2011 update
• Aviation services and the City, 2008

London's Development as a Centre for Renminbi Business

By Steven Wells, Bourse Consult

Historically, the international use of the renminbi has been inhibited by tight exchange controls, but efforts in recent years by the Chinese authorities to relax these controls have led to substantial development in cross border trade in the currency. This process of liberalisation seems to enjoy broad political support, and is seen as a policy that will eventually lead to the full convertibility of the renminbi. 

During 2012 there were significant reforms affecting the convergence of domestic and offshore interest rates, the level of permitted foreign investment into China and clearing and settlement of offshore renminbi – in particular the announcement of an international payments system giving foreign banks direct access to the Chinese central bank for settlement.

Capitalising on this liberalisation, London is ideally placed to become a leading offshore centre for RMB: it enjoys a leading position as a global foreign exchange hub, it has already developed a pool of RMB liquidity, it is able to take advantage of its central timezone between the US and Asian markets, and the City of London has spearheaded a joint public and private sector initiative to work with the Chinese and Hong Kong authorities to oversee a cohesive strategy on developing RMB business in London.

Three reports produced by Bourse Consult have shown that London’s RMB market has continued to grow significantly in the two years since the start of the Chinese programme of liberalisation of the RMB; transaction volumes in foreign exchange and trade services have increased steadily over the period. 

The latest report, London RMB Business Volumes 2012, which covers the full year 2012 and provides a point of comparison with the first survey covering 2011, shows that the London banks participating in the quantitative survey saw a very significant expansion of both the forex/risk management products and in services supporting trade during the period. This continues the trend seen in the interim survey Business volumes in London January-June 2012 which showed London participants seeing rapid growth in those areas.  

Trading of all deliverable forex-related products in 2012 with daily average of $7.7bn was 205% higher than in 2011 including spot trading which increased by 240% to $2.5bn per day. Total daily trading of deliverable and non-deliverable forex products in 2012 totalled $16.8bn per day. Trade-related services expanded with trade financing rising by 100% to over ¥33bn and letters of credit showing a 13-times increase over 2011 to ¥4.7bn.

The results suggest then that London can look forward to continued growth in terms of the range of products and the volume of RMB business over the coming years, underpinned by its strength in transactional services.

The full report London RMB Business Volumes 2012 can be downloaded in full from the City of London's website.