"Go on, then. A little closer to the edge. It's ages since anyone fell off the cliffs, so it must all be pretty safe. No, don't take any notice of the warning signs. Experts are always much too conservative. Just try a little further. How will you find out when you've gone too far? Well, I suppose... Ooops, yes, like that. Never mind, I'll send flowers to the funeral."
That's how we know that bank-bashing measures don't pose a threat to the City of London. The evidence is clear. HSBC decided to remain here rather than to move their headquarters to the Far East or to the US. According to Prem Sikka, a professor of accounting at the University of Essex, this is because the UK authorities are a relatively soft touch. There is a lot of evidence for this; no one in prison after the 2008 crash; a recommendation from the Commons' Treasury Committee that the banks' pre-2008 audits be investigated not carried through; bank levy restricted to domestic business; Martin Wheatley, the confrontational chief executive of the FCA, allowed to go at the end of his contract.
Anyone would think that the Treasury is wary of upsetting the financial community, and if they thought that they would be right. To see why, however, you simply need to look at the demographics. Currently the population of the UK is just over 64 million, and projections show that at 70 million in twelve years time. By that stage the population will be higher than any other country in the EU, although the landmass of course is relatively small. Feeding all those people depends on economic output, and a substantial part of the U.K.'s economy is service-based, much of it relating to financial services which have the advantage of bringing in foreign exchange.
Traditionally, the taxation of North Sea oil was regarded as the purest of the fiscal exercises undertaken by the Treasury. There was no real politics about it in that no votes would be lost by raising rates and, the oil being situated under the ground of the UK sector of the North Sea, there was no danger of the industry moving abroad. The challenge for the authorities was simply to set the tax rate at a level which would maximise their return. Taxing too much would discourage exploration and new production. Taxing too little would allow money to flow to the oil companies which could have gone to the UK Exchequer. The question was how to extract the most from the golden goose and that was a matter for economists not for politicians. The rates of petroleum revenue tax were set accordingly.
Go to the other extreme and you come to income tax and national insurance. Certainly the country wants the money, and certainly there is an economic tension between that need and the need not to discourage economic activity, but there are other factors as well. Over-taxation has political repercussions which may break a government. On the other hand the system must be seen to be fair and the wealthier must be seen to bear their part of the national burdens. Here then the balance which must be struck is political as well as economic.
Where then do the banks fit into all this? The public has little sympathy with their behaviour, any more than it has any sympathy with that of phone-tapping newspapers, expenses-claiming politicians or a deviant-infested BBC. It is tempting, therefore, to applaud what pressures the Treasury and the regulators have exerted on the banks, saying that it is no more than they deserved.
The trouble with that is that it addresses political resentment at the expense of the economic arguments. The City is not like North Sea oil. It is not anchored to UK ground and it would not be difficult to push business away to New York, to Singapore or to Hong Kong. Look at the number of Frenchmen in London at the moment. They are not here for the cooking but because they feel that there are no longer any opportunities to develop businesses in France.
The government's job is to strike a balance between public indignation on the one hand and the need to keep important businesses in London on the other. It isn't possible to please all of the audience. There will be those who say that it should bear harder on the banks. Heavier regulation, perhaps, higher fines and more taxes. There are those in the financial sector who will threaten to walk away if the burdens get too high.
I don't suppose that the balancing act is particularly easy but you can perhaps catch a glimmer of what goes on from looking at the bank levy. One of Osborne's "concessions" to the sector has been to limit the levy to the banks' UK business. Why? Because the UK business is anchored to the UK while the international business is not. It is the international business that may be lost if it is overtaxed. You can find the same theme running through the way overseas profits are dealt with for Corporation tax.
It is very hard to judge whether the government is too easy on the banks. You can always go a little harder, just as you can always go a little closer to the edge of the cliff. One thing though is clear. It cannot be correct, as some have argued, that the fact that HSBC has remained in the UK means that the UK has the opportunity to extract more from it. If you follow that process you inevitably go over the edge in the end. Some of the commentators seem to have had difficulty accepting this, and since they do not live at the seaside have probably missed that analogy with the cliffs as well. Never mind, I have an experiment for them to try which they might find helpful.
Take an axe, each of you, and go into a forest. Climb a big tall tree and sit on a branch that shows some evidence of rot. Take the axe and chip a piece out of the branch between you and the tree. If the branch holds you will been right in the assessment of the chip you have cut. Clearly the tree remained strong enough to hold you. Presumably then you could go a little further. I suggest you take up your axe again.