Is the Finance sector good value for money?
It seems that the public can be roughly divided in to two camps:
- Those that believe that the financial sector is efficient, beneficial & necessary (either because of genuine belief, or mere apathy /ignorance on such matters)
- Those that have suspicions about the actual positive contribution the sector plays to our economy
One of the major debating points is the contribution that the financial sector makes to Gvt tax revenues.
Let’s look at this holistically, by assesing the sector contribution to UK Gvt coffers as a proportion of total asset base used to generate that tax take. Think of the following as a form of macro-economic Return on Capital Employed (ROCE).
Firstly, the tax income, related to GDP:
Manufacturing GDP: 17% Tax contribution: 59%
Finance & business services GDP: 26% Tax contribution: 12%
This means that the Finance & services sector is the largest contributor to our GDP figures, but is woefully under contributing to the nation’s tax revenues. Manufacturing is proportionately paying 6 times the amount and therefore far more efficient at lining the Gvt purse than Finance & Services.
Now if that weren’t enough to unsettle you, then compare the asset base used by each sector to generate the tax income. I’m anticipating that the Manufacturing sector will mainly state tangible (fixed) assets on it’s balance sheet (factories, plant, machinery etc.), and I’m taking a punt here that this will amount to say about 1-1.5 x GDP in assets (UK’s total wealth is about 3-4 times GDP, and assuming manufacturing has a slightly higher share of that than their GDP contribution would state so let’s call it about one third).
Whereas the Financial sector has 5 times GDP on it’s balance sheets, i.e. more than the nation’s total wealth (source: Andrew Haldane’s Banking on the State).
Now, remember one person’s assets is another’s liabilities. So, Manufacturing creates 59% of our nation’s direct tax take by employing about one third of our wealth. Plus, if any of these businesses go bust, then at least we still have some physical assets that have the capability of generating future income.
Whereas Financial serives generate only 12% of tax by employing nearly one and half times our nation’s wealth. Oh, and those “assets” held by the banks, most of it is not tangible and has little or no “replacement value”, it is paper claims on future earnings.
It seems that the ROCE of the financial sector is about one tenth of manufacturings contribution. And I don’t see them paying ridiculus bonuses or holding the tax payer to ransom.
When you look at it properly, the financial sector doesn’t really seem that good value for money, does it?
Tax statistics source: 2006 Summary Supply and Use Tables for the United Kingdom (Summary SUTs)