Commentary by Russell Bruce
As the stour swirls from 215 non negotiating days since Article 50 was triggered on 29th March, the state of the UK’s negotiating team’s efforts is one almighty fug nobody can see through. The UK is on a rapid countdown to provide businesses with some degree of clarity for what lies ahead.
Bankers, carmakers and airlines are amongst those businesses demanding that a real sense of direction in negotiations is needed before the end of the year so they can plan for market access changes. May’s government doesn’t do clarity, so expect a further exodus of parts of businesses that rely on selling into Europe.
The hapless David Davis suggested to colleagues that his advice to banks would be to wait and see. Meanwhile 2,850 banking jobs have gone to Frankfurt – UBS, Goldman Sachs, Citi Group, Nomura and Credit Suisse. Paris is set to get 1400 jobs – HSBC and SocGen so far. Barclays have chosen Dublin to relocate 150 jobs. Dublin is also a favourite with insurance companies. A further 9000 banking jobs are going with destinations still to be announced.
In a documentary, The Spider’s Web, filmmaker Michael Oswald looks at the gravitational pull of London’s financial centre and it’s influence on politics worldwide, as reported in an interview in Deutsche Wirtschafts Nachrichten.
The film’s producer is John Christensen, a trained forensic auditor and economist. He knows the distant tax havens connected to London and where the wealth is buried. Britain’s offshore tax havens are linked in this spider’s web – the new British Empire, also known as, the City of London.
Much of this is expected to survive Brexit, as money is drawn into the web from Asian and African countries. We know that companies based in the UK also make use of these offshore havens to reduce tax liabilities with a resulting impact on UK Treasury revenues.
Surviving Brexit: Move abroad
Now the Treasury faces another hit as ‘above ground’ banking begins the process of relocating some operations to EU countries. Foreign banks contributed £17bn to UK public finances last year according the Financial Times. When British lenders, the quaint term the FT uses, are added a further £35bn is added to UK finances. The figures include corporation tax, VAT, national insurance, stamp duty, income tax and VAT paid by employees.
With a chunk of £52bn of tax revenues at risk, £18.4bn of it in employment taxes, the UK will find it ever tougher to produce a balanced budget. Several investment banks are in discussions about moving their Far East trading activities to Hong Kong from London. Another wee hole in the spider’s web with more tax revenues heading to Asia.
I don’t expect many readers have much interest in the fate of London banking jobs moving elsewhere but the impact on UK Treasury income is a warning that Scotland staying in the UK is ever less attractive because it will impact yet again on Scotland’s budget. The UK is facing Austerity 2 or is that Austerity 3.
Scotland has it own significant financial industry employing 89,000 people. Modern finance is complex and inter connected – insurance, asset management, fund management are part of the mix with personal, corporate and investment banking. To sell our financial products into Europe after Brexit Scotland’s financial sector either needs to be in the EU through our own membership or see a chunk of those jobs move.
Any loss of high value jobs creates a knock on effect for employment down the income scale, pubs restaurants and retail.
Also at risk are the funding packages put together for inter-European collaboration that benefit our life sciences and renewable energy industries, university research and more.
‘It’s complicated’ Meryl Streep said in a film I can’t remember the name of. It was a bit of an understatement. Applied to Brexit It’s complicated is off any scale you could apply. People are slowly realising just how complex Brexit is and those with a touching, if misguided, belief it will turn out all right in the end are now in the minority. Two thirds of voters think May and her team are making a mess of the negotiations. More now think we should stay in the EU than leave. Scotland, where we voted by the largest margin to Remain (62%) has seen support to Remain rise to 67%.
Inflation has risen to 3% and expected to rise again when the October figure is published. Inflation takes money out of the economy by reducing consumption as squeezed families tighten the belt another notch. As expected, the Bank of England raised interest rates to 0.5%. Whilst that may be prudent, the effect will be to increase costs for families and take more disposable income out of the economy. Media emphasis tends to be on the mortgage rate in explaining the impact but banks tend to adjust any non-fixed rates, thus increasing costs for overdrafts and business borrowings.
The FT has wisely cautioned against the further mooted increases over the next two years as the UK economy’s growth rate is lower than for other OECD countries. The National Institute of Social and Economic Research (NIESR) this week highlighted the increasing gap between growth in other major economies and the UK. It also means the cost of national debt will rise, absorbing more of UK expenditure at the expense of departmental and devolved nation budgets.
The bigger story was the impact of Brexit on living standards. NIESR calculate that income per head would be 2% higher had the UK not voted to leave the EU. The cost is £600 to the average household. The Brexit bunch might insist everything is fine but families are seeing the difference and we have not left the EU yet or have any idea of the terms on which we will do so.
Those bankers again and the real reason for increase in bank rate
Heid honcho at the Bank of England, Mark Carney believes up to 75,000 banking jobs could be lost if Britain ends up having to fall back on World Trade Organisation (WTO) rules. Banks in the UK, whether UK or overseas banks would lose their passporting rights. My contacts in the City report the Bank of England is asking banks what their plans are for moving jobs to EU countries in the event there is no deal for financial services. Carney’s estimate is therefore not without a sound foundation.
Goldman Sachs, was one of the first banks May talked to in New York in the first days of her premiership. In a rare tweet, he has only ever made 22, Goldman Sachs’ boss Lloyd Blankfein said of his recent trip to Frankfurt –“great meetings, great weather, really enjoyed it. Good, because I’ll be spending a lot more time there”.
The deprecation of sterling, against all major currencies, has been a mixed blessing for the UK with a large balance of payments deficit. A new study by Bruegel indicates that there has been no improvement in the balance of trade.
The bank rate rise was expected to give sterling a small boost. The move was anticipated and sterling rose in advance of the announcement then fell against the Dollar and Euro in the event. Such is the way markets react.
Most economists expect the rate rise to have a limited effect on growth. Apparently this has been calculated at -0.15%. In a Channel 4 interview Carney gave the most probable reason for the rise – enabling emergency support for the economy in the event of a downturn, market crash or a bad deal. There is not much left in the economic stimulus toolkit to react to a major shift in fortunes given the pressure on tax revenues Hammond will need to address next week.
The big message is borrower beware. Time to get your finances in order so you have some personal room for manoeuvre.
Stop the world! England wants to get off
For Scotland the big question is the sustainability of our relationship within the UK. As long as we stay we are dependent on getting back a share of our own taxes to implement a program of government based on Scottish political choices.
Brexit is England’s choice. Yet Scotland will leave the EU as the UK is the member state. We do not have a choice or even evidence of any real influence in the course of this haphazard, directionless negotiating stance adopted by a British government torn in all directions by internal conflict.
Independence offers a different future. That might be through membership of EEA and EFTA to retain full access to the Single Market in the first place. The EU has spoken about the possibility of ‘a holding pen’ for Scotland if it choses membership.
Independence allows for a future and a strengthened economy with real options. We stand to gain jobs lost to England in a hard Brexit outcome. There is no future in choosing isolation and diminished global status by staying in the UK. As the song says “The winner takes it all”. There’s plenty of cake to share around after England has left the scene. We can settle for a fair slice with no need to hoover up the crumbs left to the departed.
Scotland can protect its financial services industry, grow its quality food and drink sector free from high tariff barriers, ensure agriculture and fisheries continue to develop added value products and our life sciences industry can grow in the knowledge new product development has full access to European markets and continuing European collaboration on research.
Scotland has choices. England chose to cut itself off in a misguided belief that EU membership prevented it trading with the rest of the world. Other EU nations successfully trade around the world – notably Germany and other members with an economy the size of Scotland.
50 years ago Winnie Ewing said “Stop the World, Scotland wants to get on”
This sentiment is still our aspiration and cannot be achieved without at least Single Market and Customs Union membership of our nearest trading block and a market 500 million people.