A gloom has descended on the City of London. Britain's financial services industry, the engine-room of the economy, is forecast to lose 30,000 jobs this year. Vast cash bonuses are a thing of the past. Businesses which thrived on excess have had to learn moderation. And rival financial centres from Switzerland to Singapore are threatening to steal more business.
Many will welcome such a come-uppance. But this isn't an isolated issue the rest of us can ignore. The billions the City has made since the 1980s have trickled down to the capital and beyond.
In the second of a week-long series of articles, we look at what the City has ever done for the UK economy.
Mike Warren, the finance director of HR Owen, purveyor of supercars to the ludicrously wealthy, is happy with life. The luxury car market is growing, and he has a lengthy waiting list of buyers for Ferrari's new toy, the 458 Spider. If you have to ask the price, it's too much, but for the record one will set you back more than £200,000.
Fewer of his buyers are coming from the City, splashing bonus money around. Bonuses are predicted to be barely a fifth of their £11.6bn 2007 peak this year. Mr Warren says: "We cater for a fairly broad church, from the successful entrepreneur to wealthy overseas types living in London. It's not all about the City. As one sector falls another rises – if the City is a bit quiet, other areas are buoyant."
If HR Owen isn't hurting too badly from the malaise in the Square Mile, the same can't be said for the wider economy, and the public finances in particular. During Gordon Brown's decade as chancellor, financial services was the golden goose that couldn't stop laying, and he gleefully hauled in the proceeds to help fund a surge in public spending, offering the Square Mile light-touch regulation in return.
We all know how that ended. And economists say that the City, having wreaked havoc with the economy, could take a while to get back on its feet.
Rob Harbron, of the Centre for Economics and Business Research, says it could take until the end of the decade to make back the ground lost to recession: "We believe that output in the UK financial services sector will only return to peak 2008 levels by 2019 – it would be a good assumption to make from this that 2019 is when the tax take will return to roughly pre-crisis levels."
Despite the scorn poured on the bankers in recent years, it has to be said that the wider financial services sector still contributed a chunky £63bn in tax revenues last year – more than 12 per cent of total government receipts, and 18 per cent up on the year before, according to a study by the accountant firm PricewaterhouseCoopers. This was split roughly 50-50 between taxes on the sector such as corporation tax, and employer and employee taxes collected by the financial services sector, such as income tax and national insurance.
Corporation tax payments from financial services – more than £12bn before the crisis in 2007 – are now down more than 40 per cent, at just over £7bn, but started to recover last year as banks regained profitability and used up their previous offsetting tax losses, according to PwC.
Those banks are by far the biggest contributors to the Treasury coffers: they accounted for a third of the firms in financial services, but two-thirds of the tax collected. Banks paid £3.5bn in corporation tax in 2011, an increase of 67 per cent over the previous year, but still 52 per cent down on 2007.
The tax take may be slow to recover, but the sector now accounts for a bigger share of UK GDP than it did before the recession, for all the hopeful talk of rebalancing the economy away from financial services. This is because other areas of the economy took even more damage in the slump.
Another thing worth pointing out is that while the UK has run a trade deficit in manufactured goods for decades – which tends to get more attention because it is more easily measured than "invisible" services – financial services ran a trade surplus of £46.6bn last year, boosting the economy.
Chris Cummings, chief executive of the TheCityUK, is dismissive of rebalancing, and wants the Government to protect the City of London's global pre-eminence. He says. "Economies specialise – that's the truth of it. We live in a very competitive world, and other parts of the world are trying to grow their financial services. Germany is pitching for our business, and so is Asia. The UK is currently sitting on the sidelines while our major industry is being actively wooed.
He adds: "Tax policy has got to be stable and predictable, and personal tax rates are as least as important as corporate tax rates. We have to be internationally competitive, and that means heading back towards 40 per cent as quickly as possible. The industry's reputation was whopped by the Libor scandal, but it is recovering. The financial services industry should be the lifeblood of the recovery, but we want to make sure that the industry will never again cause an economic problem."
That problem is highlighted by the estimates by the Office for National Statistics, which says that the liabilities of state-backed banks such as Royal Bank of Scotland and Lloyds Banking Group have ended up adding an extra £1.5 trillion – a sum equivalent to 100 per cent of the UK economy – to the public sector net debt. This contingent liability is unlikely to ever be realised, because it assumes that all the banks' assets are completely worthless – and even HBOS wasn't that reckless. But it still emphasises the risk that the financial services sector poses, especially since the last recession was essentially made in the City.
Moreover, Carmen Reinhart and Ken Rogoff's seminal This Time Is Different – a study of 66 countries and an astonishing eight centuries of default and financial calamity – shows that the recovery process from severe financial crisis is more protracted than from a normal recession. It also underlines why institutions like the Bank of England are desperate to spur on credit through the £80bn Funding for Lending scheme.
With growth set to disappoint again when the Chancellor unveils the Office for Budget Responsibility's latest forecasts in December, the Square Mile – and financial services in general – has to shoulder its share of the blame. It also has the mother of all PR jobs on its hands to convince a sceptical public that it won't be the handbrake on rest of the British economy for years to come.
sign of the times City loses its sparkle
Cheaper champagne is the order of the day in the City as banks crack down on conspicuous consumption, according to the capital's oldest fine wine and spirits merchant.
Max Lalondrelle, director of fine wine buying at Berry Bros & Rudd, which opened its doors in St James's Street more than 300 years ago, said: "We suffered in the early part of the financial crisis, particularly in the months following November 2008, but then we were rescued by the Chinese market, as wine-buying became a refuge investment.
"Sales of the best bordeaux and burgundy are down 50 per cent. In the City there is a decline in champagne above £100 a bottle, the Cristal; now customers are buying more £50 to £100 bottles.
"In 2007, it was about being seen to drink the expensive stuff, but not any more."
Sign of the times: City loses its sparkle
Cheaper champagne is the order of the day in the City as banks crack down on conspicuous consumption, according to the capital’s oldest fine wine and spirits merchant.
Max Lalondrelle, director of fine wine buying at Berry Bros & Rudd, which opened its doors in St James’s Street more than 300 years ago, said: “We suffered in the early part of the financial crisis, particularly in the months following November 2008, but then we were rescued by the Chinese market, as wine-buying became a refuge investment.
“Sales of the best bordeaux and burgundy are down 50 per cent. In the City there is a decline in champagne above £100 a bottle, the Cristal; now customers are buying more £50 to £100 bottles. “In 2007, it was about being seen to drink the expensive stuff, but not any more.”