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Lower City Bonuses Mean Lower UK Tax Revenues

by Robert Lee,, London

31 October 2011

With City bonus levels falling, the taxman could also lose out as a result of lower revenues, making the Treasury the 'real loser' according to new research by the Centre for Economics and Business Research (CEBR).

The Cebr's research shows that bonuses paid out in the City of London in 2011/12 fell to a third of levels seen pre-recession. The Centre expects payouts to fall year-on-year by 38%, to GBP4.2bn (USD6.7bn), the lowest figure since 2002/03 - a far cry from the GBP11.6bn recorded in 2007/08.

A much weaker City economy is to blame, with turmoil caused by the debt crisis in the eurozone constraining activity in the City, and several major banks announcing weak results for Q3 2011. In addition, the CEBR expects up to 27,000 City-type jobs to be lost over the course of the year and remain broadly at that level in 2012, while the prospect of tighter regulation is placing further downward pressure on activity. The recent trend of remunerating workers through higher salaries and lower bonuses plays a part in both the downward movement in total bonuses and the loss of now more expensive employees.

The CEBR argues that one of the biggest losers in this situation is the taxman. Over half the bonuses (GBP2.5bn) paid out this year will end up in the hands of the Treasury. When bonus levels were at their peak of GBP11.6bn in 2007/08, the Treasury collected GBP6.8bn. The CEBR stresses that this clearly illustrates how the taxpayer also misses out when the City pays lower bonuses.

Total bonus payments are expected to remain broadly flat through 2012/13 before starting to recover as global growth picks up substantially in 2013. However, the level of City bonuses will remain below recent highs until at least 2015/16, and are not expected to return to the peak seen in 2007/08. Indeed, the highest projected figure is GBP4.6bn, to be achieved in 2015/16.

The CEBR says its latest figures demonstrate how London’s position as a world-leading financial centre remains under threat. It also warns that the Far Eastern centres of Hong Kong and Singapore are rapidly closing the gap with London, and with the prospects of tighter regulatory measures for the City, that gap is only likely to closer further. This could mean London results in being overtaken as the leading global financial destination.

Rob Harbron, CEBR economist and co-author of the report said: “The drop in both bonus payments and the number of City-type jobs is concerning for London as a financial centre and for the UK economy as a whole. With financial services helping drive the capital’s economy and London historically leading the growth of national output, subdued activity spells more weak prospects for the coming year.”

Douglas McWilliams, CEBR chief executive, added: “Although I wouldn’t want to be a Porsche salesman now with the fat cats having to tighten their belts, the real losers from falling bonus payments are the Treasury and the taxpayer.”

TAGS: tax | economics | business | financial services | employees | Singapore | United Kingdom | Hong Kong | regulation | individual income tax | services

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