There was much that was absurd about Wednesday’s pre-Budget Report, from Alistair Darling’s failure to outline a realistic plan to prevent Britain’s national debt from exploding, to his risibly over-optimistic long-term growth forecasts. Public spending will jump again next year, we’re told. Schools, hospitals and police will be protected from cuts if Labour wins the election — which, plainly, it has not the slightest expectation of doing. This was about political positioning, banker-bashing, with a new bonus tax, and pretending to the electorate that a few efficiency savings and National Insurance tweaks will be enough to rescue Britain. The intention was to deceive voters, with the pain only kicking in after the election.
It is ironic to hear the Chancellor telling the City to ‘start living in the real world’, for his Budget (it tinkered too much to justify being called a ‘Pre-Budget Report’) was a work of pure delusion. The ‘efficiency savings’ he mentioned are, of course, largely imaginary. Then let us take Mr Darling’s forecast that the economy will break into a sprint, with growth of 3.25 per cent for four consecutive years starting the April after next. Not a single independent economist shares this view. He imagines the 50p tax will raise revenue: it is very unlikely to do so, despite the crackdown on allowances — thereby increasing the burden on the poor.
But what was most extraordinary about the Budget was that it confirmed that the Conservatives have largely signed up to this new anti-City, soak-the-rich agenda. David Cameron is right that a sensible centre-right party should be calling for a reformed, more prudent City. But Tories have instead decided to join Labour’s revenue and prosperity-destroying hunt for those on large incomes. George Osborne did not raise a squeak of objection to any of the banker taxes. The Tories have yet again been duped into accepting Labour’s destructive consensus.
Mr Osborne, famously, has two roles: election co-ordinator and shadow Chancellor. There is a clear conflict of interest. Beating up bankers is the best way to win votes, but also the best way to destroy Britain’s hopes of recovery. Financiers used to generate a quarter of corporation tax receipts. We badly need them to do so again. In this globalised world, it has never been easier to move people or money; countries have lower tax rates because they want more revenue, not less. Like Mr Brown, Mr Osborne is putting politics first and economics second.
Britain has attracted investment and skilled people in large part because our post-1988 tax system was reasonably clear, didn’t penalise money-making and was not subject to abrupt changes in direction. This reputation, already badly damaged by Labour’s tax hikes on non-doms, capital gains and high-earners (once again, all supported by the Tories), was finally buried in the Pre-Budget Report. Mr Osborne’s response was to dance on its grave.
But what is most worrying about the Labour/Tory hang-a-banker mood is that it shows that, even now, neither Chancellor nor shadow Chancellor has grasped what caused the recession. Both seem to think that bonuses led Britain into disaster when the root cause was a giant intellectual error shared by much of the political and financial establishment. They wrongly regarded low consumer price inflation as a panacea and ignored the excessive growth in the supply of money and credit, which fuelled bubbles in asset prices. The Bank of England kept rates too low; everyone ignored the build-up of liquidity in Asia. Regulators, convinced that fancy mathematics had tamed risk, actually encouraged banks to whittle down their reserves and lend to subprime borrowers.
To be sure, this is a more complex analysis than ‘those bankers did it’. And, alas, it seems too complex for the Conservatives, who seem to find it easier to pretend that bonuses were the root problem. This intellectual error was horribly clear on Wednesday, from both sides of the House.
Remarkably, many in the government as well as the opposition appear to have convinced themselves that City institutions are sitting ducks that will never relocate to more pleasant climes. The reason? Apparently they like the schools. They like the time zone. And all giant financial institutions need a giant government to bail them out in case of a crisis, we are told, which means that they will never leave the UK. The taxes will be a price worth paying for the safety net, the type of which was not available in Iceland.
But if Mr Osborne had his economic hat on, rather than his electioneering one, he might consider a few facts. There are more immigrants in the financial sector (16 per cent) than any other (including construction and catering). These are people who have already packed their bags once to move here; why would they not do so again? London is one third immigrant, investment banks and hedge funds even more so. The Brits who accept invitations to politicians’ dinner parties may swear they will never migrate. They may even be telling the truth. But it is the Japanese, French and Americans who will take their tax revenues elsewhere.
HSBC’s boss has just quietly relocated to Hong Kong. The Obama administration is making a distinction between the banks still on the government’s payroll (such as Citigroup) and those that have reprivatised themselves, such as Goldman Sachs. Absurdly, neither the Tories nor Labour seem to recognise the crucial distinction between RBS, which has taken billions in capital from the government, and Barclays, which hasn’t taken a penny.
Even if the bigger banks don’t quit, hedge funds, insurance companies and other smaller players will; and new firms and people won’t move here. And we can forget about the G20 acting as a cartel to guarantee no hiding place for the bankers: the Labour-Tory consensus on hitting the City is putting London at a huge disadvantage. The Swiss papers are full of stories of refugees from London coming to stay. Americans and other bankers are starting to refuse to move to London. Without their money, the poorest in Britain will have to pay more to plug Labour’s gargantuan deficit.
Britain has only one hope for recovery. That is to nurture investment, improve education, encourage entrepreneurs and robustly defend its status as a reformed, calmer but still pre-eminent global financial sector. As setbacks go, the Pre-Budget Report was hard to beat.
Allister Heath is editor of City A.M.