City Turmoil Could Cost $20B in Losses

The recent turmoil in financial markets could cost the Exchequer as much as £10bn per year in lost revenues. Research by Credit Suisse based on past market downturns suggests that a 10 per cent fall in real share prices "might eventually be associated with a 7.5 per cent fall in business investment and a 2.5 per cent fall in consumer spending. The larger part of the impact on business investment comes through over a two to three year period. It takes longer in the case of consumer spending". This would equate to about 2 per cent of GDP, a significant hit, with an implied reduction of around the same magnitude in Government revenues, or approximately £10bn per year by the end of the timescale.

Even if share markets recover swiftly, the continuing crisis in credit markets is a potentially larger source of disruption. In the medium term there is the unknowable impact of lay-offs, financial losses relating to sub-prime lending, a general depression in earnings in the financial sector and the cost to the Bank of England of any losses it suffers as a result of lending to banks. Financial services account for some 8.3 per cent of the GDP, very roughly £100bn, so any reduction in the health of the sector would have serious repercussions for the UK economy as a whole, and especially for London and the South-east. Philip Shaw of Investec Securities comments: "A large shake-out of the UK financial services sector could have a noticeable effect on the economy. Given the fast pace of growth in this area recently (10.4 per cent in the year to the second quarter of 2007), it has contributed over a quarter of the 3.0 per cent increase in GDP this year. If this key driver is taken away, the effects on growth will be very visible. In the last downturn, corporation tax paid by the financial sector fell by 30 per cent between 2000/01 and 2003/04."