The UK economy relies increasingly upon its financial services sector, yet the city is increasingly under attack from both politicians and the press. In order to survive the UK needs to bolster its financial institutions and reverse the long-term decay in its manufacturing sector – and the best way to do that is by changing the taxation system. The Federation of European Employers (FedEE) reports.

During the 11 months to November 2012 the euro area produced a trade surplus in goods of 81.80bn compared with a deficit of 15.7bn over the same period in 2011. By sharp contrast the UK trade balance in goods deteriorated sharply to a deficit of 152.9bn. Speaking at a business briefing in London this morning the Secretary-General of the Federation of European Employers (FedEE), Robin Chater, warned that: “The UK economy is already effectively bankrupt. Its long term trade balance in goods has been in deficit for years and last year it deteriorated by a further eight percent. Capital investment is at an all-time low and the only thing holding the UK economy together is the City of London – which is being criticised and undermined by government, press, media and the population at large – the very people whose living standards depend increasingly upon it.” The UK needs to value its financial institutions whilst, at the same time, take drastic steps to generate jobs in its manufacturing sector. Why is it that the Irish Republic is pulling itself out of a bigger downturn in its economy than that suffered by the UK? It is because over the last two decades it has encouraged manufacturers to set up there by offering one of the best rates of corporation tax in Europe. Ireland looks like it will have generated a 40bn euro trade surplus in goods last year – whilst the UK has sucked in a huge volume of imports to meet domestic demand.

There are two simple things the UK government could do to now to reverse this problem – although I fear that they will not have the courage or vision to do them.Firstly they should couple the corporation tax and income tax systems in order to bolster investment and generate jobs. For instance, starting with an appropriate baseline, companies could be told that for every pound that they paid into the PAYE tax system on behalf of employees they could save the same amount in corporation tax – provided that at least 90% of the increase in PAYE contributions arose from increased employment. This would not only lead to rapid job growth but also a reduction in the informal economy. The level of tax generated would remain the same (if not higher), but the burden of welfare costs would decline significantly. To sustain the stimulus into future years it would also be necessary for companies to retain some of the advantages gained – provided that personnel numbers are also retained.

Secondly they should play the patriotism card – to encourage UK consumers to buy British. Since 2005 more 1.5m jobs have been lost from the UK by offshoring production to the Far East. Rising wage levels in China and India coupled with growing unrest threatening the continued passage of goods through the Suez Canal will eventually encourage many companies to bring production back home. However, this process could be accelerated if government encouraged their citizens to buy locally produced goods and companies were given incentives to reshore their activities. “Mr Chater further reflected on the fact that the financial sector had come under attack from all sides in recent years, largely on the back of a number of well publicised scandals. “I cannot help feeling, however, that much of the animosity has arisen from popular envy about the salaries and bonuses received by many senior bankers and stock market traders. What their critics fail, however, to understand is that such rewards arise from the huge risks that those in such positions are required to take. More import still is the fact that without such rewards there would be a much greater risk that people charged with so much money would turn to bribery and fraud – and the integrity of the system would be lost. The best measure that governments could take would therefore be to strengthen the regulatory system and otherwise support financial institutions to carry out their critical role in sustaining the UK economy.”