Could City Bank Tax Cuts Revive an Ailing Post-Brexit Economy in the UK?
In the lead-up to the Brexit vote, the warnings from economists were stark. Under the guidance of Prime Minister David Cameron, the then-government warned that leaving the European Union would trigger a steep drop in exports and a painful slump in house prices, triggering an immediate recession.
Given Cameron’s staunch opposition to leaving the EU, his reasons for calling a referendum in the first place remain a mystery to many. And, immediately after the Leave result was announced, he resigned. Even the leader of the Brexit campaign, fellow Conservative member of Parliament and future prime minister Boris Johnson seemed surprised by the result. In fact, according to a report in the Financial Times, Cameron later claimed that Johnson embarked on the Brexit campaign convinced his side would lose but ultimately hoped to bolster his political career by appealing to party activists.
Irrespective of party politics, the country’s leading economists warned almost unanimously that the UK’s divorce from Europe would have a lasting negative impact on the country’s economy. Five years on from the referendum vote, the true impact of Britain’s decision to leave the EU remains somewhat murky.
The fallout from COVID-19 has muddied the waters considerably, with the economic impact of Brexit and that of the pandemic impossible to separate in many instances. Indeed, the short-term hit following the referendum in 2016 was nowhere near as severe as experts warned. They had predicted that property prices would slump by 10 percent and the national income would fall by 3.6 percent within two years of the Brexit vote, but these fears failed to materialize, largely because the UK government did not invoke Article 50 until March 2017, starting the formal legal process for a member country to leave the EU.
Fast forward to 2021, and the UK economy has undeniably stalled. One British think tank warns that intertwined issues caused by Brexit and COVID-19 have culminated in a £700 billion loss of output for the UK’s national economy. According to forecasts from the National Institute of Economic and Social Research, the country is facing more severe, permanent damage in the wake of COVID-19 compared with other developed nations. The organization attributes this to the collective impact of Brexit combined with a “poor COVID-19 response.”
In the run-up to the referendum, Britain was warned that the loss of EU passporting rights would lead to many banks moving their operations out of London, relocating to fledgling financial hotspots like Frankfurt, Paris, and Dublin. Investment banks donated heavily to the Remain campaign. HSBC warned before the vote that it would move up to 1,000 trading jobs to Paris in the wake of a Leave verdict. François Villeroy de Galhau, governor of the Bank of France, warned that banks that continued to operate in London would lose their EU passporting rights once the UK left the common market.
With a nationwide vaccination program well underway in the summer of 2021, economic recovery in the UK started to gather momentum. Sectors like construction and manufacturing started to recover most of the ground lost in 2020, although social distancing policies continued to hamper recovery in sectors such as travel and hospitality.
Chancellor of the Exchequer Rishi Sunak is set to provide the UK finance industry with a welcome boost. Analysts predict a reduction in profit levies in the next budget, strengthening the UK banking sector and arming it to retain its dominance over the EU. The UK Finance Board is scheduled to meet for the first time in months on Thursday, October 21, 2021. After petitioning for levies on bank profits to be slashed from 8 percent to 3 percent, it appears that their wish is about to be granted.
Representing almost 300 UK finance firms, UK Finance argues that cutting taxes for banks will help keep London competitive post-Brexit, protecting the city against threats from EU rivals that have been enjoying significant increases in financial services since the UK split from the EU. As one city bank chief explains, the UK is in a difficult position right now. Any move by the government to help the industry would be welcome.
With interest rates close to zero, running a bank is incredibly difficult in the current economic climate. As one banking industry expert explains, the more competitive tax rates are for UK banks, the less of a disadvantage they will be at in trying to compete with EU banks.
UK banks paid more than £39.5 billion in taxes last year, according to data from UK Finance. With the sector left feeling neglected post-Brexit, and French President Emmanuel Macron striving to lure foreign talent, banks have already moved more than £1 trillion in UK assets to the EU, along with thousands of staff. It is hoped that the move by Rishi Sunak will go a long way toward quelling the exodus, leveling the playing field to keep UK banks competitive.
