Britain risks losing its way. Prolonged shame and anger over the financial crisis have turned all political parties against the City and even against wider business and wealth creation. In small ways here and there, it is starting to show, with weak investment levels and hints that the global rich are looking for more welcoming locations elsewhere.
Good riddance, some might say. But that would further condemn the UK to fading from the global stage, and leave our economy in the doldrums. HSBC’s threatened departure to more welcoming shores is the latest symptom of that malaise.
But such a symbolic disaster for the City could be just the shock we need. How better to shake politicians out of their current miserable state, and force them to remember what it is that makes economies prosper?
Make no mistake, HSBC’s departure in itself would be a very bad thing for Britain. But it could represent our best chance to escape the current vicious anti-business, anti-wealth rhetoric, and set the UK on a more open, more capitalist course to success. Not many individual companies have a noticeable impact on the Budget, but HSBC is one of them. Last year it paid £750m in the bank levy alone, on top of corporation tax and the charges paid on its almost 50,000 UK staff. If it left, that would blow a serious hole in the government’s rather fragile financial plans.
But there could be a serious upside. Right now, the Conservatives are enthusiastic banker-bashers, while Labour under Ed Miliband is stridently anti-business. Such an enormous departure could be just the shock we need to remind politicians why we need to welcome global companies to our shores, and the dire consequences of driving them away.
Witness the development of the bank levy as an example of the current unhappy state of play. When George Osborne launched the bank levy in 2010, he wanted to raise £2.5bn per year, arguing it would force banks to make a contribution to the public coffers in the wake of the financial crisis. Levying a 0.05 per cent charge on banks’ balance sheets was not seen as excessive in the wake of the crash, when the goal was to raise funds while encouraging banks to shrink.
Since then Osborne has hiked the levy an astonishing nine times and now aims to rake in £3.7bn per year. On top of that, the levy is seen as a permanent tax, rather than a temporary post-crash measure. Indeed, hiking the levy to 0.5 per cent represented the biggest single taxation measure of the 2015 Budget, showing how heavily even the Conservatives now rely on taxing banks to pay for other promises.
As the levy is charged on UK banks’ global operations, HSBC is the biggest contributor by far. A 0.5 per cent charge on its operations around the world is a major challenge to a lender that has to compete with other global banks, plus national and regional lenders in each country Osborne’s Treasury – and the rest of the UK – would have been better off charging a lower amount and keeping HSBC here, rather than getting greedy and driving it away. It is the Laffer Curve in action. Trimming the levy is unlikely to help keep the bank here. A more drastic change of direction is needed.
A key attraction of the UK for foreign firms and investors is the stable legal and tax system. Britain might not have the lowest taxes in the world, but at least it is relatively competitive and investors know what to expect. Ramping up the bank levy and threatening an arbitrary bonus tax does not help.
Threats to ban acquisitions of favoured companies, as Vince Cable occasionally considers, will stop investors putting money here in the first place. And indulging in rants against “the one per cent” is hardly going to encourage wealth creators to make Britain their base.
Critics argue that banks have said this before, threatening to leave when times get tough but choosing to stay instead.
Firstly, that is one reason why HSBC’s departure would be such a shock – and one big enough to blow this argument for endless tax hikes out of the water for good.
Secondly, HSBC is surely among the most mobile of the big banks. It has a 150-year history, but only moved its headquarters to Britain when it took over the Midland Bank in the 1990s.
And thirdly, that argument fails to take into account the business that never comes to Britain because of high taxes and intervention. HSBC came to London because the City was once a welcoming place for foreign institutions. Giant US banks are already reluctant to move teams or business lines to London because of the extra cost of the bank levy, and that will only get worse as banks face higher and higher taxes. In an age of mobile communications, fewer bankers and traders really have to be based in London. It has never been easier to lose business to rivals.
If we carry on in this vein, taxing banks ever more heavily and vilifying successful wealth creators as a matter of course, the impact might only be noticed over time. Britain will lose out to other finance and business centres like new York and Hong Kong, and the success stories of emerging markets will not move to London. We will fade into irrelevance – and when we do notice, it will be far too late. A big shock is required to force a change of direction, and HSBC could provide it.
Such a titanic global firm upping sticks and moving to Hong Kong would be an unavoidable symbol of British decline, doing enormous harm to our reputation as a welcoming business centre, as well as to our public finances. It could stop the Conservatives in their tracks, reminding them of the source of the wealth that they are spending on public services. It could jolt them out of their current malaise and make them think of our place in the world. They might even remember the “global race” they were once so keen on winning.
Even in Labour’s camp, it could give some members and leaders a second thought. While it would be tempting to crow in delight at international financiers fleeing the country, it would also be self-defeating. Labour’s plans need more financing than the Conservatives’, and driving businesses and taxpayers to other countries will not help raise a penny towards that.
HSBC quitting the UK might be a very dark cloud, but if it turns Britain off its current course and pushes us towards free markets and lower taxes, it could help make us all better off in the end.
