I wish it was just taxi-drivers, angry lefties and FX dealers that believed that the financial sector is really 25% of our economy. If it were, we would be doomed and I’d happily join that crowd in buying baked beans, shotgun pellets and snout and heading for the hills (or, more likely, emigrating to all those virtuous places that do real things).
But the view is surprisingly prevalent. Just recently, I have just read it in Skidelsky’s “The Return of the Master“, and also heard it from Liam Halligan (see past post). The extent to which Vince focussed on this topic also suggested that in his mind, the future of Finance is a major factor for the British Economy. Everyone seems to believe it, supporting the narrative that “we” don’t do anything valuable any more, just buy and sell stuff to each other, and now we’ve been found out ha ha ha (see letter from smug Dane, for example).
The ONS with their Blue Book has not helped. Here is the killer chart for the doomsters:
Oh help, they’re right! It says “FINANCE”, and it seems to add to £350bn!
When a number looks so remarkable, dig. What are its implications? Well, since about 1m people work in finance, this would come to £350k each. Since the average pay is £50k, we now have in our hands the first piece of evidence in a long time that financial workers are underpaid. (A CBI speech, no link, recently pointed out that financial services salaries were 4% of GDP, or about £55bn).
So I dug. It turns out that this number is for all items in the Blue Book covered by Input-Output codes 100-114. Digging then took a lot longer than it should have. Going from this ONS page and through this link in the Blue book, I eventually found that the real code for Financial Intermediation (buying and selling), was QTPR, and this amounted to about £100bn or so last year – that is 8% of the economy.
What is the Blue Book doing? It is including lots of stuff that are hardly related at all to those mad people in braces shouting into phones. If you follow this link through and go to page 29, you find that in the IO groups in question are:
101 Insurance and pension funding, except compulsory social security
102 Activities auxiliary to financial intermediation
103 Real estate activities with own property; letting of own property, except dwellings
104 Letting of dwellings, including imputed rent
105 Real estate activities on a fee or contract basis
106 Renting of machinery and equipment without operator and of personal and household goods
107 Computer and related activities
108 131 Research and development
109 Legal activities
110 Accounting, book-keeping and auditing activities; tax consultancy
111 Market research and public opinion polling; business and management consultancy activities; management activities
112 Architectural and engineering activities and related technical consultancy; technical testing and analysis
114 Other business
Renting/letting of dwllings is itself 2-3 times the size of financial intermediation. Since our housing wealth is about £4trn, that sounds about right. And it is not going to go anywhere – people need places to live, office blocks to occupy, and so on.
Money and Management make it clear that the 8% that really is financial intermediation is large – it has helped finance government coffers, an export deficit, and so on. But it’s not 25%. Calm down.
(This was all too much hassle to prove something obvious. The easier thing to do would have been to point people to a Wikipedia page. Another easy thing to do is to force people to read the Bischoff piece of industrial lobbying analysis of financial services. But tracing the causes of the error is useful, and scratched an itch for me).