Financial services: contribution to the UK economy

By Georgina Hutton, Ali Shalchi

8 December 2021

Financial services: contribution to the UK economy

Summary 1 Measuring the contribution of the financial sector 2 Economic output 3 Jobs in financial services 4 Trade in financial services 5 Taxation of the financial services industry 6 Future of UK financial services sector

commonslibrary.parliament.uk

Number 6193

Financial services: contribution to the UK economy

Contributing Authors Matthew Ward

Image Credits Canary Wharf / winter by George Rex. Licensed under CC BY 2.0 / image cropped

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Commons Library Research Briefing, 8 December 2021

Financial services: contribution to the UK economy

Contents

Summary

5

1 Measuring the contribution of the financial sector

6

2 Economic output

7

2.1 Economic output over time

7

2.2 Financial services in the regions and countries of the UK

9

2.3 International comparisons

10

3 Jobs in financial services

12

3.1 Jobs by region

13

4 Trade in financial services

15

4.1 Financial services trade with the EU

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4.2 Financial services trade with non-EU countries

17

5 Taxation of the financial services industry

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6 Future of UK financial services sector

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6.1 Regulatory reform

21

6.2 The UK as a global financial centre

24

6.3 Trade deals

24

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Commons Library Research Briefing, 8 December 2021

Financial services: contribution to the UK economy

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Commons Library Research Briefing, 8 December 2021

Financial services: contribution to the UK economy

Summary

This paper provides information on the economic output of the financial services sector and international comparisons; the number of jobs in the sector; statistics on the sector's exports and imports; and the amount of tax it contributes to the Exchequer.

In 2020, the financial services sector contributed ?164.8 billion to the UK economy, 8.6% of total economic output. The sector was largest in London, where half of the sector's output was generated.

The UK financial services sector was the third largest in the OECD in 2020 by its proportion of national economic output. Luxembourg's financial service sector was the largest in the OECD, contributing 25% of the country's economic output.

There were 1.1 million financial services jobs in the UK in Q1 2021, 3.3% of all jobs.

Exports of UK financial services were worth ?62 billion in 2020 and imports were worth ?16 billion, so there was a surplus in financial services trade of ?46 billion.

35% of financial services exports went to the EU and 31% of financial services imports came from the EU.

Future of the UK financial services sector

A twice-yearly ranking of the competitiveness of financial markets compiled by a City of London and a China-based think tank ranked London second in the world (narrowly behind New York) in September 2021. Edinburgh was ranked 22nd, down from 13th in September 2020.

The data so far suggests that jobs and business has been lost to other financial centres as a result of the UK leaving the European single market, but the impact may not be as big as initially feared by some. Our briefing The UKEU trade deal: financial services discusses the UK-EU trade deal's provisions on financial services and its impact.

The Government has embarked on far-reaching reform of financial services regulation with the aims of increasing competitiveness and taking advantage of newly-obtained freedoms to shape regulation after leaving the EU. Agreements have been negotiated with countries including Japan, Singapore, Switzerland and Australia as well as Norway, Iceland and Liechtenstein which contain provisions on financial services and which the Government believes will help boost UK financial services exports.

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Financial services: contribution to the UK economy

1

Measuring the contribution of the

financial sector

Measures of the financial sector usually include the activities of a wide range of firms, including retail banks, building societies, investment banks and hedge funds, and are wider than the activities of financial services firms located in the City and Canary Wharf. Mostly, `financial services' in this briefing paper are defined as the financial and insurance activities sector, Standard Industrial Classification Section K.

These statistics usually measure the contribution of the financial services and/or related sectors on a stand-alone basis. To some extent they may under-estimate the sector's total contribution to the UK economy. This is because a well-functioning financial sector may have positive "spill-over" effects for other sectors of the economy. For example, it may increase firms' access to credit and therefore help other sectors to grow.

There are a several other sources of information on the financial services sector. City UK represents the interests of the financial services sector in the UK and publishes an annual assessment of the economic impact of the UK financial services sector, most recently in November 2021: Enabling growth across the UK 2021: UK-based financial and related professional services. The City UK analysis uses different sources and so is not directly comparable to the data used in this paper.

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Financial services: contribution to the UK economy

2

Economic output

2.1

Economic output over time

Financial and insurance services contributed ?164.8 billion to the UK economy in 2020, 8.6% of the total.1 It was the fifth largest sector in terms of overall economic output.2

This differs from data published prior to 2021 due to ONS revisions to output data (see Box 1). These changes led to financial services output being higher as a proportion of total UK economic output compared to previously published data.3 For example, prior to the 2021 revisions, financial services output in 2019 was reported as ?124.9 billion, or 6.3% of UK economic output. After revisions, this is now ?164.8 billion or 8.6% of total economic output.

Financial services economic output

% of total UK economy, 1990?2020

10%

9%

8%

7%

6%

5%

4%

3%

2%

1%

0% 1990

1995

2000

2005

2010

Source: ONS Series KKP5 and KKK9

2015

2020

1 In terms of Gross Value Added (GVA). GVA is similar to GDP but used to measure the contribution of part of the economy, such as an industry or region. In brief, GVA is the contribution of part of the economy, minus any costs incurred in production.

2 Of the 20 main industrial sectors based on Standard Industrial Classification sections. 3 ONS, In the balance ? How we are improving our estimates of GDP, 28 June 2021; ONS, Impact of

Blue Book 2021 changes on current price and volume estimates of gross domestic product, 28 June 2021.

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Commons Library Research Briefing, 8 December 2021

Financial services: contribution to the UK economy

Financial and insurance activities have grown as a proportion of total economic output since the early 2000s.

There was strong growth during the early 2000s, but since the financial crisis in 2008/9 the size of the sector has remained relatively stable as a proportion of total economic output. In 2020, the sector contributed 8.6% of the UK economic output, down from a peak of 9.1% in 2009.

This trend differs from data published prior to 2021 due to the recent revisions (Box 1). Growth in the sector is now lower on average in the years leading up to the financial crash, and higher in the last few years.

1 Revisions to financial services economic output

As part of its annual `Blue Book', which presents the UK national accounts, the ONS implemented technical changes to how it calculates economic output data.4 For the financial services sector, this included changes to the survey used to better capture the development of the financial services industry in recent years. In particular, the survey enabled the contribution of Other Financial Institutions (OFIs) and financial auxiliaries, such as administration of financial markets, risk and damage evaluation and fund management activities, to be better represented.

4 ONS, In the balance ? How we are improving our estimates of GDP, 28 June 2021; ONS, Impact of Blue Book 2021 changes on current price and volume estimates of gross domestic product, 28 June 2021.

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Commons Library Research Briefing, 8 December 2021

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