Curbing Finance, Building Industry
It’s good to see that Martin Wolf continues to be provocative, even as the nation eases itself into a long weekend (‘Why Britain has to curb finance’, Financial Times, p. 11). Indeed, he raises so many important issues, it’s difficult to know where to start.
He is right to point out that the UK has, in his words, “a strong comparative advantage in the world’s most irresponsible industry”. He is also right to remind us that light touch regulation led the way to a race to the bottom (as trade unions argued it surely would).
We then come to the crux of the matter.
Wolf challenges us with this question, before answering it himself: “How should one manage a sector [the finance sector] that produces so many ‘bads’? The answer is: in the same way as any polluting activity. One taxes it.” Cue dropping jaws and ashen faced panic across the Square Mile!
Wolf argues that financial services are more important for taxation and the balance of payments than they are for GDP. He says that “smaller net earnings from financial services would have generated a lower real exchange rate and more earnings elsewhere. Given the costs imposed by the financial sector, a more diversified economy would have been healthier.”
This raises two issues. First, the need for a grown up discussion about tax is as urgent as ever. The 50p top rate of tax brought sharp criticism from the CBI annual dinner earlier this week, yet surely the concept is simple enough. Those who earn much more must be required to pay a little more. And those engaging in unhealthy or socially disadvantageous activities should be discouraged from doing so by the tax system. If taxes could help keep City excess in line, while raising money for the Exchequer in the process, what’s the problem? In a week of public anger towards what is seen as inexcusable greed, Martin Wolf hits the spot perfectly.
The second issue, as the TUC has consistently argued, is that we need a better balance between finance and industry. Wolf tells us that in 2007, the UK ran a trade deficit of £37bn in financial services, partially offsetting an £89bn deficit in goods. That has to change. At last we have a modern industrial strategy and a Secretary of State, Peter Mandelson, pushing it forward. That work must continue in the weeks to come.