London’s post-Brexit situation – Is it all doom and gloom?

Brexit series for FT.

It’s already been 3 years since the Brexit referendum was voted on. Over these 3 years, there’s been a feeling that the United Kingdom’s economy has been slowly stagnating and failing to grow with long term perspectives.

Although this may be true, it’s not necessarily all doom and gloom for the Brits. There’s absolutely no way that London could lose its title of the financial capital of the world. It may take a little bit of damage, but in terms of numbers and international operations, there’s just too much to be done in this one city compared to pretty much anywhere else.

In order to determine what the government could do to shore up any issues with the economy we first need to determine what those issues could be.

The financial industry’s problems in London

Most of the large offices are located in London. Almost every single financial company that operates in the United Kingdom as well as on a global scale has at least one or two offices in London. 95% of the cases is that the headquarters is located in the capital.

What this means is that a lot of decision-makers are concentrated in one city, which will very soon become a bundle of a legal mess when it comes to dealing with their European contemporaries.

The EU law dictates that almost no financial company has the right to cater to the EU population without having formal registration and office in the EU. This could be a serious issue for the employees of the UK’s largest financial companies.

The companies will become more motivated to move offices outside of London and into different countries. It’s not necessarily known whether the companies will move with their staff or without, but what we do know for sure is that the decision-makers in these large firms could remain calm.

The operations are what should be looked after the most.

The Financial industry represents nearly half of London’s GDP, around 120 billion BP to be exact. The overall GDP of London is somewhere in the range of 370 billion BP. If we factor in outsourced companies, foreign companies and various different services that can technically be classified as financial companies, then we get to a closer number of 180 billion BP.

Now imagine the amount of money these companies spend on compensating their employees in the operations department.

It’s likely that more than 500 billion BP is being spent in London in terms of salaries, and that’s just a small estimate. Take away about half of it for the decision-makers and higher-ups of these firms and we get around 250 billion BP for just the operations staff themselves. Furthermore, there are nearly half a million people employed in this sector. Consider the chaos that would ensue if these jobs would disappear over a year, which is quite fast actually.

The issue of shoring up the loss of capital needs to be addressed immediately. But it seems like the government already has an Idea of how to do it. This will mostly include targeting the gaming industry within the country.

A similar case can be seen in Australia, where the government is extremely aversive towards the gaming industry but tends to soften up in front of the nation’s largest company, simply because they overpay on their taxes.

Because of such dispositions, even the most popular online roulette casino games tend to become forgotten in the face of a large corporation. Smaller businesses, be they offline or online, fail to compete with large firms under such circumstances, thus being forced to close down. Once this happens, the demand remains the same, but the supply decreases. This funnels new customers to large corporations, thus increasing their “contribution” to the local economy via corporate tax.

Overall, the main issue that London needs to address is the ever-growing real estate prices that prevent employees of these companies to purchase or even rent a house on their own, and the upcoming unemployment epidemic if most firms decide to leave the city.

The government has plans for the budget, not for the people

The UK government has already drawn up plans on how to shore up the lost corporate tax income from these financial companies once Brexit does indeed happen.

The estimated loss has not been determined quite yet, and those that have are usually misinformed or distorted. What we can say is that the estimated loss is somewhere in the neighborhood of a quarter of a trillion BP.

The UK government has decided to potentially increase taxes on non-essential industries. These industries include a sector, long-reviled by most Brits, the gambling industry.

You see, the government is planning to increase the prices of acquiring licenses in the UK’s jurisdiction, especially around London, thus limiting the number of newer casinos.

They will, therefore, increase the taxes as well, limiting smaller venues to compete with the bigger ones. Even if the smaller casinos run dry, the country will still have larger venues which will receive a whole new clientele, therefore more income, therefore more tax.

In this case, the UK government has indeed found a win-win situation. However, with this reform, there’s a good chance that overall gambling in the country could decrease dramatically due to the lack of variety.

Has the doom and gloom already started?

Several major banks have already committed to taking their staff or a large portion of their capital outside of the country. Around $1 trillion’s worth of capital is being moved outside of the UK and funneled into cities like Amsterdam, Paris, and Frankfurt. If these strategies continue like this, it’s likely that London will have a -1% growth rate in 2020, compared to a projected 4-5% growth for the cities listed above.

It’s likely that the growth of the local economy will remain stagnant until a new niche is discovered in the financial market.

The exchanges, hedge funds, brokerages etc might find it hard catering to the EU population without regulation, thus decided to move out as well.

The best alternative at this point would be to focus on Fintech and the blockchain to retain some kind of dominant financial access to the rest of the world.