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Bash the banks and global companies if you must, be we need them more than ever

February 4, 2013

Berate banks and bankers if you wish.

Slate the tax arrangements of large multinationals, whose contributions in VAT and employers’ national insurance remains substantial even if their corporate tax contributions (thanks to a hopelessly complicated UK tax code) fall short of that demanded by a print media (whose own holding companies are operated by tax-efficient trust).

But for so long as UK governments of any colour remain addicted to spending well beyond our means, then we are in hock to both banks and global corporations. For even as the annual ritual of banker bonus baiting is upon us, it is these institutions that are integral to the market system that feeds the national borrowing and spending addiction.

The harsh truth is that the clamour for ever greater public expenditure is the biggest roadblock to meaningful reform of our banks.

The government’s attempts to kick start bank activity via the Funding for Lending scheme have delivered some success in the area of subsidised mortgages (albeit largely where borrowers have existing significant equity holdings). More faltering has been progress at lending into the real economy.

As bank manager after bank manager has told me, the trouble is that for all their plans to lend more widely there are relatively few borrowers in the market place at the moment. Confidence remains elusive. Meanwhile the twin burdens of tax and fears as to rising interest rates are dissuading many companies from investing for the future.

The big retail banks remain fearful of the next toxic legacy of the boom years of the Noughties that will begin to unravel. PFI, Libor, interest rate swaps and other synthetic derivative products will no doubt be joined by a range of other novel financial products that were marketed in the past, but with the benefit of 20:20 hindsight will be regarded as missold. If in future banks are terrified at the prospect of any sort of innovation we should not be surprised to see their profits plummet permanently. The prospect of several new waves of class action litigation claims arises at the very time we desperately need banks to lend normally. If certainty and stability does not return to the world of financial services there is precious little prospect of the UK enjoying the future economic wellbeing that is created by growth.

Few would dispute David Cameron’s recent proclamation at Davos that when it comes to paying tax, large multinationals need to ‘smell the coffee’.

However, taking such a political stance has its risks. Not that anyone should be overly concerned at the knee-jerk reaction by many FTSE 250 communications directors in the immediate aftermath arguing that UK Plc was being ‘talked down’.

A more legitimate concern is the hazard that tax and regulation becomes arbitrary. One of our nation’s greatest assets as a place to do business is our reputation as predictable, reliable, certain and underpinned by the rule of law. We undermine that timeless tradition as an open place to trade and prosper at our peril.

If large international corporations are arranging their affairs to avoid paying their ‘fair share’ of tax, the government should cease moralising and get back to legislating such loopholes out of existence. Naturally the sheer complexity and size of the UK tax code, now larger even than the once-derided Indian version, has been the creator of the highly remunerated Guild of Tax Avoiders.

What should worry us most is that once the tax authorities are empowered to make ethical judgements on the affairs of global corporations, before long they will turn their attention to ordinary taxpayers, who have every right to feel that once settled their tax affairs should not be re-opened on a whim.

This perceived imbalance between the rewards for success and the risks of failure is the essential roadblock to restoring confidence in our small, medium-sized and growing business sectors. Without it economic recovery will remain tantalisingly elusive.