The City: Not that Important

Finance and Professional services are not synonymous with The City, something Rob Marchant (via Chris Dillow) needs to grasp when discussing Hollande’s lessons for Ed Miliband.

And, regarding his policy programme, it is difficult to see Hollande being a pragmatist in government. For example, take this declaration from a January speech:

“My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”

All very well, I suppose, down with capitalism: hurrah. But, whatever additional regulation the financial sector may need, is it a good idea, on any level, to emote about it being the “enemy”? In any event, this is an approach that Miliband would be wise not to try to emulate; in a country like ours, where one-fifth of GDP derives from the City, it would have very deep implications for government credibility, for borrowing and for investment. It is easy for France to talk about a financial transaction tax when it has a tiny financial sector compared with the mighty City; everyone wants higher taxes for the other guy.

The City probably adds about 4% to UK GDP not a fifth, that number is from 2003 and The City probably added a little more than that between 2003 and  2007 and a lot less (perhaps negative?) since then. [1] It’s contribution to GDP is still about half that of UK manufacturing (!) and about a fifth of the total 20% added by all finance, insurance and professional services combined. Data from the ONS. This is where I presume Rob Marchant got his one fifth figure from by adding K48, K57 of page 19.4 and deriving a percentage from cell K77.

Discussion of high and low finance should be separated, something which I suppose Hollande needs to take on board as well. I should perhaps tentatively suggest three things: that most finance is dull, should be dull and most of it takes place outside The City. It consists either of taking short term deposits and lending that money out at a rate slightly higher rates or taking payments from large numbers of people and paying a small subsection of them large sums when something bad happens. It is very dull, very worthwhile and  it adds a lot of value but it is a world apart from what occurs in The City.


[1] Remember that many firms in The City receive a huge hidden subsidy each year too.

For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.

Not small sums at all, and I recommend you read Haldane’s speech in full. The City’s contribution to GDP is modest, although its contribution to exports is larger.