By Daniel Lanyon on Wednesday 28 September 2022
Government borrowing is going up to fund top rate tax cuts under a new UK growth plan aimed at incentivising investment. But targeting a strong fintech sector could be a greater economic multiplier.
You may have noticed the UK has a bold new plan for growth. But the market - and the International Monetary Fund - haven’t much liked it.
Outlined last week by Chancellor of the Exchequer Kwasi Kwarteng, the most eye-catching policy in a now notorious “mini-budget", at least in a tabloid/nostalgic type of way, was the proposed removal of a cap on bankers’ bonuses that has been in place since 2014.
While there is some logic to the move, more policies aimed at stimulating the entrepreneurial part of the City of London, and the UK’s financial services sector, in general, would have more impact and prove less divisive.
Incentivising and bringing forward friendly regulations aimed at the UK’s world-leading fintech sector would be a better policy to boost growth.
Better and more competitive financial services act as a huge economic multiplier in almost un-quantifiable ways. From lending, payments, custody, banking and many more subsectors of finance, digitalisation boosts momentum and makes the financial system less systemically risky.
If the cap fits
The cap on bankers' bonuses, which limits payouts to two times bankers’ salaries, was brought in to quell public anger at a pieced lack of adequate retribution, not to mention prison sentences, toward bankers for their part in the 2008 financial crisis. Albeit, six years after the fact.
Before this, bankers had almost unlimited upside when it came to their compensation, as long as they were making money for the bank (and their shareholders). In the washup from the 2008 financial crisis, banks' bonus culture became an increasingly political issue.
The cap sought to dampen a widely held public view of excessive risk-taking by banks synonymous with the film The Wolf of Wall Street which was released in UK cinemas in the same year (2014) the cap was introduced.
Growth, illusive growth
Kwarteng believes that the UK is woefully undersupplied with economic growth-bringing forces that can expand the economic pie for all and help close gaps in what are increasingly strained public finances. The pandemic and the energy crisis mean difficult times ahead but growing the economy in theory will mean higher tax revenues to fund the fiscal chasm.
“We want businesses to invest in the UK, we want the brightest and the best to work here and we want better living standards for everyone,” said Kwarteng on Friday.
“Economic growth isn’t some academic term with no connection to the real world. It means more jobs, higher pay and more money to fund public services, like schools and the NHS. This will not happen overnight but the tax cuts and reforms I’ve announced today – the biggest package in generations – send a clear signal that growth is our priority,” Kwarteng said.
A round of fresh investment from global banks, buoyed by the lifting of the cap and the ability to pay bonuses to their hearts’ content, will boost London’s financial services sector and enable it to stay ahead of Paris, Frankfurt and even New York, he believes.
The argument for removing the bonus cap is this. Since the cap was introduced banks have had to pay higher salaries to attract talent owing to lower potential bonuses than in other financial centres.
This means a higher cost base that is less geared to performance meaning a higher risk to the business in downturns. By reversing the cap, banks would be incentivised to offer star performers higher returns as well as not be forced to absorb higher costs when the banks are not making money.
Repealing the era of a cap on bank bonuses was not the only policy unveiled by the new chancellor. He also announced policies to tackle energy costs to bring down inflation, cancelled a planned rise in corporation tax rise, as well as cut the basic rate of income tax cut to 19 per cent one year earlier than planned. He also relaxed Stamp Duty rules to stimulate the housing market.
The best bit of news for fintech, and other entrepreneurial industries, was a series of measures to bolster the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
Kwarteng said the EIS and Venture Capital Trust (VCT) schemes will be extended beyond their original 2025 sunset clause and that the SEIS caps will be increased.
From April 2023 companies will be able to raise up to £250,000 of SEIS investment, a two-thirds increase, while the gross asset limit will be increased to £350,000 and the trading-based eligibility criteria extended from two to three years. The cap for investors will rise to £200,000.
Of course, in economies such as the UK - which nominally are dubbed “advanced” by economists - growth does not come easily. It depends on a huge variety of influences that are brought about by long-term investment and smart regulations and it tend to compound over time.
Quick fixes and headline-grabbing policies will unlikely help in the short term. It is true that even a rapidly accelerating fintech sector will struggle to push up UK growth, being just a small part of the overall economy.
However, scaling the UK’s fintech sector will have profound effects for the better on the availability of capital, access to cutting-edge technology skills and nurturing of innovation clusters. Not to mention sharper, cheaper and more effective financial services to the whole of the economy.
It might just raise a few less eyebrows among people struggling to pay their heating, energy and mortgage bills too.