HSBC’s decision to keep its headquarters in London is good news for the British government. An exit would have been seen as a vote of no confidence by one of the world’s major financial institutions. But it is even better news for the British economy.
If HSBC had deserted the U.K. for Hong Kong it would have been a serious blow to the confidence of the City, perhaps leading to further departures and a slide in the position of London as the world’s financial capital. U.K. financial services contribute about 8 percent of total GDP and about 20 percent of London income alone.
In the wake of the global financial crisis the popular press—and perhaps popular opinion—is generally on the side of bashing the banks, but we have to remember that this is one of the most important sectors of the U.K. economy.
Tax Burden
A key factor in HSBC’s decision to remain in the U.K. was Chancellor George Osborne’s decision to change the way banks are taxed. In addition to corporation tax, in 2011 the last government introduced a levy on bank’s balance sheets (basically on the total liabilities of the bank, including deposits placed with the bank), which was subsequently increased nine times until it stood at 0.21 percent in 2015.
While a 0.21 percent levy might not sound a lot, there are two important factors to take into account: the level of interest rates and the way the levy was calculated.
Given that the business of banks is to borrow and lend, when interest rates are a fraction of a percentage point, a levy on the balance sheet of a fraction of a percentage point can be a significant tax.
