Home > Finance and money > Is the Finance sector good value for money?

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)

http://www.statistics.gov.uk/about/methodology_by_theme/inputoutput/latestdata.asp

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Categories: Finance and money
  1. January 26, 2011 at 5:35 am

    That appears to be a brilliant analysis!

    But do you factor in payroll taxes? All service industries employ whereas manufacturing can become robotized? Consumption therefore is larger due to spending by employees? That said, the FIRE sectors are all too big to be sustainable TBTBS! Inevitably they fail leaving people qualified for little!

  2. November 24, 2011 at 3:51 pm

    KAPOWWW…. Another laser guided bullshit-busting missile from Andy Haldane of the BoE:

    “The upshot is a potentially significant over-estimation of the valued-added of the financial sector. The size of this effect is potentially very large. For example, Colangelo and Inklaar (2010) suggest that, for the Eurozone as a whole, adjusting for risk-taking would reduce the estimated output of the financial sector by about 25-40 % relative to the current methodology. If the same factor were applied in the UK, the measured contribution of the financial sector would suddenly drop to about 6-7.5% of GDP.

    “There is a second, equally important, reason why the measured value-added of the financial sector in the national accounts may be seriously over-stated. We now know that the risk being taken by banks was not in fact borne by them, fully or potentially even partially. Instead it has been borne by society. That is why GDP today lies below its pre-crisis level. And it is why government balance sheets, relative to GDP, are set to double as a result of the crisis in many countries.”

    http://www.voxeu.org/index.php?q=node/7314

    Andy just better be careful out there. I just hope he doesn’t get himself Spitzered !

  1. January 19, 2011 at 5:10 am
  2. May 26, 2011 at 11:35 am

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