From the October 14, 2007 Sunday Times
October 15, 2007
by Irwin Stelzer
“No way, no how . . . Aw, come on!” That was Rudi Giuliani’s reaction when it was suggested during the recent presidential debate that London might replace New York as the financial capital of the world. And he didn’t even know at the time that Alistair Darling was about to make a major assault on London’s role as a leading financial centre.
This is not to deny that London has its attractions to the world’s financial players. It is in a great time zone from which to do business around the world (but New Yorkers are better at getting up early and working late); has good theatres (featuring mostly musicals that ran in New York decades ago); and uses the universal language of business (a variant of the one spoken on Wall Street).
And for a time it seemed that London also had a regulatory system that was more attractive to investors; a generous tax regime that left income earned outside the UK untouched by the British tax collector and favoured small businesses looking eventually to tap the public markets for capital; and an appealing quality of life. Times change.
Pictures of nervous depositors lined up to get their money out of Northern Rock made the front pages of newspapers around the world – a scene unknown in New York since the 1930s. Worse still, Britain’s central bank, and some of its regulatory authorities – the very ones New York mayor Mike Bloomberg recently trotted over to consult and then emulate – didn’t know what to do.
It seems that the British deposit-insurance system is inferior to that in America: the level of protection is less, and it takes six months to get your money, which makes it tough on pensioners living on their savings. So Chancellor Darling, resting from the tiring task of listening to the pips squeak after his new squeeze on the taxpayer-lemons, is considering adopting the American insurance system. Score one for the American financial regulatory system, and New York over London.
It also turns out that the responsibility for the safety of Britain’s banks is divided among three agencies, which, in effect, means nobody is in charge. This is not exactly the regulatory system Bloomberg should be studying – and not one investors are likely to find as congenial as the American system, especially now that the Sarbanes-Oxley act has had a few tweaks to ease the administrative burden it places on some firms. Score two for New York.
As for the tax regime, it is a lot less favourable than it was when the moaning about the decline of New York and the rise of London began. The Labour government, desperate for cash, has decided to milk the financial sector. Americans who are resident in Britain, but keep their main link with the United States, the so-called nondoms (of which this writer is one), will not only have to pay taxes on what they earn and spend in Britain, but an annual fee of £30,000 for permission to work in London. That is not much for an investment banker, but not peanuts for most others. Score three for Gotham.
More bad news for the City: private-equity operators will soon pay taxes at the rate of 18%, rather than 10%, on profits from their deals. And so will entrepreneurs who have built their businesses in the hope of cashing out at the 10% rate that then-chancellor Gordon Brown introduced to encourage job-creat-ing entrepreneurship. Some of these moves distribute the tax burden more fairly, but at the same time they do make London a less attractive place in which to locate a business.
Then there is the small problem of the $2 pound, which makes London a much more expensive city in which to do business than New York. Some businesses can afford it. A hedge fund recently rented about 5,000 square feet of space in May-fair at a reported price of almost $300 per square foot. That’s about five times the rate on Wall Street. Other businesses have to think hard before running up the kind of costs now common in London, and imposing those costs on their globe-trot-ting executives. New York’s Park and Fifth Avenues are low-rent districts compared with similar parts of London.
Then there is the quality of life. In preGiuliani New York, Wall Street-ers spent time trying to figure out how to get transferred to their firms’ London offices. No longer. New York is now one of the safest cities in the world, and London one of the most dangerous.
As for infrastructure, the New York transport system is a paragon of efficiency compared with London’s. Trains in London don’t run when there are leaves on the tracks; our assistant often has to allow three trains to pass before one arrives that she can squeeze on to. And the famed London black cabs are too expensive to be the alternative that their less expensive counterparts are in New York.
Finally, compare bland, reassuring Mike Bloomberg with a London mayor who welcomes Muslim preachers calling for the death of Jews, homosexuals, and anyone else who disagrees with them. Not a pretty picture to people who have New York as an alternative.
None of this means that London is finished as a financial centre. As in most cities, the rich can shield themselves from many of the problems. And like New York, London has some of the world’s finest museums, art galleries and music venues. The parks are things of beauty.
Sammy Davis might have overstated things when he said that when you leave New York you don’t go anywhere. London indeed remains an important “somewhere”. But recent events make it less of a threat to New York as a financial centre than it was just a few months ago.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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