A ra ther alarming fact about Britain is tucked away in our piece on tax, the very rich and the City of London: one third of all corporate tax is paid by the financial services sector. A successful financial sector is a boon—it generates nearly 1m jobs, many of them very well paid; it contributes a surplus of nearly £20bn to the trade balance as well as all that corporate tax, which helps build new schools and hospitals. Moreover, the financial heartland of the City of London helps make the capital the most international on the planet. But this growing dependence on a largely foreign-owned sector leaves a lot of people feeling uneasy, and nostalgic for a time when manufacturing counted for more.
Some of this is just an old prejudice against finance, which takes different shapes in different eras. In the 1970s, people worried about the City's reluctance to finance domestic industry. Now the sceptics point to the dangers of finance crowding out other activities and grabbing too big a share of the country's wealth and brains. And what if the western world suddenly wakes up to the fact that it is over-supplied with financial services? If there was a shakeout, Britain would surely be hit hard. This may be an unlikely prospect, but I do share some of the unease about finance's growing domination of the economy. For one thing, even when the sector is flourishing, or especially when it is flourishing, it aggravates the tendency towards income inequality. This is not quite as simple as it seems. The story of the past decade or so has been catch-up at the bottom (thanks to redistribution) and pull away at the top (thanks to the success of the City and other "creative" industries and Britain's general attractiveness to the super-rich). The most dynamic financial firms tend to have a few highly skilled, highly paid professionals at the top, rather fewer people in the middle, and cleaners, receptionists and security men at the bottom. Finance, unlike manufacturing, is bad at generating middle-income, middle-status jobs. Moreover, fairly or not, the dominance of the finance sector encourages people to see economic life as a lottery, but one skewed in favour of the people at the top—many of whom seem to live detached from any national social contract. This belief can only have been reinforced by publicity about hedge fund billionaires and the recent arguments about private equity. We may no longer have much choice about our economic future, but it is surely still worth asking whether it is possible to pursue social democratic political goals in a finance dominated economy. Perhaps something for a Gordon Brown commission to consider.
