TheCityUK has today submitted the following recommendations to Her Majesty’s Treasury as part of its Budget representation:
Proposal #1: Retain a sense of proportionality and purpose regarding the bank levy
The bank levy was introduced in the wake of the financial crisis to ensure that the burden of fiscal consolidation falls across the widest possible range of industries. It may also have the desired effect of reducing risk-taking among financial institutions, although the evidence is inconclusive. However, having been raised nine times since its introduction in 2011, the levy is now a disincentive for firms to operate in the UK. The issue is most acute for international firms, which are increasingly likely to take the policy explicitly into account when deciding whether or not to launch, continue or expand operations in the UK. The loss of any such actual or potential future business would have a negative impact on job creation and tax revenue—the financial-services sector is, after all, the largest source of tax revenue in the UK, contributing £66bn in 2014. Moreover, the policy is detrimental to the UK’s competitiveness as an international financial centre, not least because of the uncertainty created by the frequent changes to the rate. The Government should therefore be aware of the risk that a policy such as the bank levy might appear beneficial in isolation, but may impose negative externalities which might outweigh those benefits if the overall economic and market impact is taken into account. It must ensure that its call for a globally competitive tax regime applies to all sectors, including the banking sector.
Proposal #2: Ensure that the Home Office and BIS collaborate to set immigration policy
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 and foreign companies alike to thrive and invest not only in London, but in Birmingham, Glasgow, Manchester, and other cities throughout the UK. But any proposed new limits on immigration risk exacerbating the skills shortage that many businesses already face. TheCityUK welcomes the Government’s initiative to encourage millions of new apprenticeships, but training and apprenticeships strengthen the labour force only over the medium term and cannot address existing shortages of skilled labour. It is therefore extremely important for immigration policies to support the competitiveness of UK-based businesses. In this way, policy will help to achieve the Government’s stated goal of raising the productive potential of the economy and increasing living standards. For this reason, the Home Office should consult with BIS when determining immigration policy to ensure that any changes will not adversely impact businesses.
Proposal #3: Establish an independent body to examine long-term savings policy
The UK needs a renewed, sustained political consensus to build on the initiatives that are already in place to encourage saving—such as pension auto-enrolment—with the overarching objective of increasing the long-term savings level in the UK. Insofar as domestic savings constitute an important source of long-term funds for investment, encouraging long-term saving could simultaneously benefit savers and facilitate infrastructure renewal. It will be important to ensure that the tax system complements other policies to encourage saving rather than detracting from them. Recent piecemeal changes to pension tax relief constitute a disincentive to save and also reduce consumer trust in the system. We therefore advocate reform of the pension-tax system that would create a fairer and simpler system and one which incentivises saving for the majority. For example, a flat-rate pension-tax relief system would be clear and easily understandable and could encourage greater saving.
Other issues that such a new independent body could address include:
- Raising the minimum level of employee auto-enrolment;
- Increasing contributions beyond 8% through additional ‘nudges’;
- Improving engagement with saving by simplifying disclosure rules; and
- Identifying targets that help people understand what they need to save at different stages.
- Proposal #4: Increase R&D expenditure
Research and development plays a crucial role in supporting short-term and (especially) long-term economic growth. Its role is even more important in highly-developed, services-oriented economies like the UK. Yet UK spending on R&D was equivalent to only 1.7% of GDP in 2012, less than the average for the EU28 of 2%, and far below the level in France (2.3%) and Germany (2.9%). There is a strong link between direct Government funding, tax incentives and private-sector R&D spending, and increasing national R&D subsidies and building on best practice can thus play an important role. Government policy should also aim to improve public-private research collaboration and encourage the formation of innovation clusters where companies and public-sector institutions jointly work on research projects and seek funding. The EU’s 2020 strategy has set national combined public and private sector R&D spending targets of 3% of GDP, and the UK should aim to match this. The UK Government should also give high priority to negotiating with the European Commission to continue to secure a significant share of EU R&D funding. Finally, the UK Government should use the review of the Multiannual Financial Framework scheduled for 2016 to raise the issue of spending allocations, and push for the proportion of funds devoted to R&D (currently 13%) to be increased.
Proposal #5: Collaborate with the private sector to ensure a pipeline of investor-friendly infrastructure projects
The Government’s focus on infrastructure development, including as part of the creation of a ‘Northern Powerhouse’, is encouraging. Such investment will help support both short-term and long-term economic growth and will also help to maintain the UK’s international economic competitiveness. TheCityUK’s members and its Infrastructure and Energy Sectoral Advisory Group indicate, however, that a lack of investible projects is a barrier to a significant increase in spending. The Government should therefore offer support to the private sector in the selection of viable, investor-friendly infrastructure projects. By removing the political risk that dominates infrastructure projects, the public sector can help to transform marginal projects into investible projects. TheCityUK also recommends that the Government collect the details of current and forthcoming infrastructure projects to make investment opportunities more visible. Working in collaboration with local and regional authorities, the Government could introduce a national infrastructure database (linked with the database set up as part of the European Fund for Strategic Investments), thereby improving the ability of investors to assess and commit to infrastructure projects.
Proposal #6: Reiterate the Government’s commitment to FSTIB
The 2013 Budget included the establishment of the Financial Services, Trade and Investment Board, a public-private initiative to promote the UK as the global leader in financial services and to ensure that the industry maximises its potential in maintaining the UK’s broader competitiveness in the world economy. It would therefore be appropriate in this, the new Government’s first Budget, to highlight FSTIB’s important work in areas such as extra-territorial EU regulatory measures; relations between policymaking, regulatory and supervisory bodies; and emphasis in bilateral and multilateral discussions on the need for open markets, enhanced market access and a level economic playing field. We recommend that FSTIB commission a structured review of UK competitiveness in financial and related professional services; TheCityUK would welcome the opportunity to deliver this. Finally, giving FSTIB its own independent budget would enhance its ability to continue its work to increase the UK’s competitive advantage in financial and related professional services and respond to particular threats in this area.
Proposal #7: ask the NAO to review the FCA’s activities
As part of the Government’s promotion of a “better regulation” agenda, TheCityUK recommends that HM Treasury ask the National Audit Office to conduct a value-for-money review of the Financial Conduct Authority’s regulatory and supervisory activities. There is a precedent for such a review: in 2007, the NAO conducted a review of the Financial Services Authority to help ensure that the Authority’s work was both impactful and cost-effective. Similarly, two years after the FCA’s creation, this is an opportune time to review the work of the UK’s financial conduct regulator to ensure that it is valuable and cost-effective, and that the regulations and supervisory standards it crafts are in proportion to the issues they seek to address. Above all, such a review would emphasise the UK’s commitment to ensuring that regulation conform to the highest possible standards.