TheCityUK has sent the below letter to the Chancellor as part of its Budget representation.
TheCityUK is pleased to submit its views to HM Treasury in preparation for the 2016 Budget. The forthcoming Budget is being prepared at a time of growing caution about economic prospects in the UK and the world at large. Although preliminary estimates showed the UK economy expanding steadily, at 0.5% in the fourth quarter of 2015, annual average growth for that year slowed sharply from 2014, and many forecasters expect a further moderation in 2016 . Negative sentiment was apparent in the Bank of England’s latest monetary policy statement, which noted the “likely persistence of the headwinds weighing on the economy”; on 4 February the Bank revised down its forecast for growth in 2016, to 2.2% from 2.5% previously. With astute recognition of the extent to which the UK’s economic outlook is influenced by factors beyond the UK’s control, you recently emphasised the growing likelihood that external economic conditions could negatively affect the outlook for the UK even with the balanced policies in
The UK economy benefits from its strength in globally leading services; in the latest quarter (Q4 2015), services was the only sector to make a positive contribution to growth. Growth in business and financial services (an ONS categorisation) remains in line with service-sector growth as a whole, but on a year-on-year basis, it has now slowed for four consecutive quarters. On the basis of both its structural importance to the economy and its significant contribution to growth, the financial and related professional services sector has a crucial role to play in driving domestic and export-led growth. Because of this, and in light of the increasingly uncertain economic outlook, we offer the following policy proposals designed to facilitate the industry’s ability to maximise its positive contribution to the UK economy.
Proposal #1: Ensure that long term tax-policy supports wider policy objectives
The possibility of weaker-than-expected economic growth has negative implications for tax revenue collection, and therefore for the Government’s plan to achieve a budget surplus by 2019 (the OBR data that accompanied the 2015 Autumn Statement included an ambitious tax-receipt growth forecast of 6.4% in 2016 and an annual average of 4.7% in the subsequent four years). It is natural, therefore, that the Government considers tax policy with a view to the fiscal consequences of any changes as well as to the UK’s competitive position.
The link between taxation and competitiveness is often direct—for example, through the labour-market effects of income taxes. It also has longer-term, indirect effects, such as the extent to which the public finances overall influence long-term interest rates via sovereign borrowing costs. The Government’s continued commitment to ensuring an internationally competitive tax regime by lowering the headline rate of corporate tax is welcome.
TheCityUK also urges Government to consult on significant changes to taxation with businesses before they are introduced in order to avoid potential unintended consequences that may materialise because of the impact of such changes on business incentives. For example, although headline corporate tax rates have been falling, business rates vary considerably by sector and can serve to disincentivise investment. For this reason, TheCityUK’s Independent Economists Group has recommended that tax-reform efforts be focused on (among other areas) business rates.
Where changes to tax systems will place administrative or financial burdens on businesses, it will be important for the Government to ensure that firms can bear these costs in order to move to a better system overall.
Additionally, any reforms should concentrate on policy simplification; for example, volatility in investment allowances makes it more difficult for companies to make long-term plans, with potentially negative implications for long-term investment. We recommend that the Government consider the opportunity to incentivise further capital spending by firms through a re-examination of investment allowances. This step could help kick-start corporate investment and bolster productivity.
Further, we hear repeatedly from investors that policy stability (within a competitive regime) is crucial; the recent rapid pace of change in the tax-regulation sphere means that the volume of regulation and compliance requirements for businesses are now as important a factor in the UK’s competitiveness as a financial and related professional services hub as are headline tax rates. The Government has won plaudits internationally for its pro-business tax stance and this will be further bolstered by reasserting the recognised need for open consultation, gathering of evidence, and properly calibrating any changes to taxes falling on firms.
Proposal #2: Emphasise regulatory certainty and procurement practice in infrastructure policy
The Government expects nearly two thirds of the UK’s current infrastructure project pipeline to be funded solely by the private sector, and almost £50 billion, a further 11% of the total, through forms of public-private partnerships. It is essential that the Budget (1) provides investors and consumers with certainty, (2) increase the government’s own capacity to deliver projects, and (3) includes measures to attract and sustain new sources of finance. Faster rates of infrastructure investment growth have an important role to play in bolstering headline economic growth, both in the short term and the long term. According to analysis conducted by TheCityUK in collaboration with Accenture, a one-off 5-basis-point increase in infrastructure investment growth in 2014 would have increased the GDP growth rate in 2015 by 0.05 percentage points . The timing of new spending is critically important when considering the desired macroeconomic effect. For example, the future of HS2 and HS3 are being discussed now. While the value of HS2 is questioned today, as HS1 was in its time, it is important that the Government take the lead in providing certainty for investors. HS3 and accompanying investment in the road systems would provide greater access to markets for Northern England, creating a hub of prosperity in the Northern Powerhouse.
The creation of a number of regulatory asset-based infrastructure sectors has provided investors in the UK with major safeguards compared to other jurisdictions (e.g. against retrospective ‘asset-taking’ and non-performance). The industry and Government have a shared desire to ensure that the UK continues to hold its international esteem as a stable market.
The infrastructure investment industry no longer suffers from a lack of liquidity as it did during the global financial crisis but now faces the challenge from a dearth of investable projects. TheCityUK supports the greater use by Government of procurement professionals to ensure that their expertise is deployed across all project areas to make projects financeable, bring them to market and to make certain that value for money for consumers and taxpayers can be achieved. The Government’s unique role is in developing pipelines of projects rather than one-off opportunities. This enables the industry to gear up to bid and for the government to gain extra value for money for taxpayers through the competitive tendering process. This recognises that the UK is in a global market place for infrastructure investment and how international finance will go to the markets with the best prepared procurement environment.
The case for a post-financial crisis return to securitisation—with greater transparency—has been made by the Bank of England and the European Central Bank. The UK has an important role in setting the new global standards that would enable this to be a success and which builds on the UK’s presence in the G20 and key international financial institutions. TheCityUK sees the development of global standards and best practice, as envisioned by the G20, as way of helping to address the global infrastructure gap using the skills, assets and experience of its members.
Proposal #3: Work closely with the financial-services industry to address the opportunities and challenges posed by increasing financial digitisation
TheCityUK welcomes the work that Government has been leading to promote the UK as a global centre for FinTech, an important growth area that already employs over 61,000 people across the UK and has generated over £6.5bn of revenue in the last year alone.
FinTech, and innovation in financial services more broadly, sit at the heart of the UK’s competitiveness for financial services in the years ahead. The industry stands ready to work with the Government to address the issues and opportunities through the very valuable work of the Financial Services Trade & Investment Board.
To confirm the UK’s global pre-eminence in FinTech, the Government and industry can work together to identify and support the innovations which will have the greatest impact in terms of choice and competiveness for consumers and in terms of the efficiency of the financial services industry. Government and industry can support FinTech innovation through developing and utilising the best talent in the world. Regulators too play an important role and there is a growing recognition of the need to ensure a modern and collaborative regulatory environment both here and across borders. Regulatory coherence for FinTech both within the EU and across the globe will enable emerging technologies to be deployed in multiple markets with less of the complexity and cost which will inhibit innovation – it is right that the UK should take a leadership role in this endeavour given the expertise in UK-based firms and the resulting job creation.
Technology poses threats as well as opportunities, of course, and another, more worrying, aspect of the increasing digitisation of the economy and financial markets is the threat posed by cyber-crime. The financial and related professional services industry is likely to remain a key target for cyber criminals. In recent years, attacks have grown in frequency, sophistication and damage wrought; cyber security will therefore remain a major concern for companies, regulators and the Government.
TheCityUK has been analysing the issue of cyber security in the financial and related professional services industry, and believes that the most effective strategies for ensuring that the sector is as resilient as possible will require firms to collaborate with one another as well as with the Government, regulators and other stakeholders. This approach runs counter to the conception of individual cyber attacks as firm-specific breaches of intellectual property, but increased information-sharing would better enable law enforcement agencies to disrupt cyber threats. To this end, we welcome the creation of the National Cyber Centre announced in November 2015 and commend deeper engagement with the industry. The industry should and must play its part, but Government also has a crucial role in disrupting cyber threats in view of the intelligence capabilities which the private sector does not have. The National Cyber Centre’s creation as part of the major new National Cyber Security Programme is laudable, and its success will be measured by the extent of its cooperation and information sharing with the private sector.
Another area where collaboration between the industry and the Government will be crucial is in widening the pool of available talent. The Government has already indicated its intention to facilitate training and education in technical areas such as coding. These initiatives should be prioritised and implemented on a national basis as soon as possible to allow firms, including those in the financial and related professional services industry, to hire appropriately skilled staff who can be part of the first line of defence against cyber-crime.
TheCityUK is already engaged with the Bank of England, Cabinet Office, CERT UK, the City of London Police, the FCA, HM Treasury and UKTI on these issues. The Government has already demonstrated its forward-looking approach to both FinTech and cyber-crime, and has taken important steps to create the right conditions to ensure that the opportunities presented by financial digitalisation are maximised and the threats minimised. Our proposals in this area seek to enhance the UK’s pre-eminent global role in FinTech and cyber security, and we look forward to continued collaboration that reinforces the importance of a joint industry-Government approach.
Proposal #4: Prioritise policies that maintain the competitiveness of the UK’s labour force
To maintain the competitiveness of the UK as a global financial centre, UK-based firms—both domestic and foreign—need the flexibility to employ the best people at different stages in their careers. For example, ensuring that companies have a sufficient pool of skilled technical workers to combat the cyber risk discussed in Proposal 3 may require a combination of training and skilled international expertise. Companies also need the same freedom and flexibility to deploy their staff abroad – vital to international business operations. A flexible labour market and a highly skilled workforce are among the UK’s greatest competitive advantages. Taken together, they comprise a crucial part of the supportive business environment that enables UK-based companies to thrive and invest not only in London, but in cities throughout the UK. The financial and related professional services industry now employs a record 2.2m people - with two thirds of those outside the M25.
The link between the labour force, international expertise, and competitiveness holds both in the short and long term. Attracting international expertise can play a critical role in addressing skills shortages – and this goes hand in hand with business’ role in developing skills among the labour force. The financial and related professional services industry is proud of its contribution in this regard—for example, by offering more than 11,000 apprenticeships in 2014/15 in addition to the other recruitment opportunities offered to graduates and non-graduates.
In the long term, a flexible labour market which attracts highly sought after people will continue be crucial to offset the ageing of the UK’s population and the consequent shrinking of the labour force; data from the past 20 years shows that the UK’s population has gotten younger in tandem with an increase in net inward immigration. The size of the labour force is one of the key determinants of long-term economic growth, and the growth rate has a direct bearing on the fiscal position since tax revenues are positively correlated with growth, and benefits spending is negatively correlated with growth.
I and my team would be happy to meet with you and your officials to discuss these proposals and analysis further. I trust they will be useful as you prepare for the next Budget and that they go some way to supporting the continued economic growth and job creation we all wish to see.
Chief Executive, TheCityUK