City of London costs UK £4.5tn in lost economic growth


City of London costs UK £4.5tn in lost economic growth

A new report reveals the UK’s oversized financial sector has cost the economy £4.5 trillion in lost economic output between 1995 and 2015 – equivalent to £67,500 for every person in the UK, or 2.5 years of economic output.1

The report, published today by the Sheffield Political Economy Research Institute at the University of Sheffield, reveals that the UK economy would likely have performed much better in overall growth terms if its finance sector was smaller, and if finance was more focused on supporting other productive areas of the economy.

Crunching the numbers

The report provides the first ever numerical estimate for the scale of damage caused by the UK’s finance sector growing beyond a useful size. Of the £4.5tn loss in economic output, £2.7tn arises from the misallocation of resources where skills, investments and resources are diverted away from their most productive uses by the gravitational pull of oversized finance.2 The other £1.8tn arises from the 2008 financial crisis.

In addition to the cost of the stunting effect that the City of London inflicts on the overall UK economy, the report also estimates the cost of the City of London’s excessive redistribution of wealth from the majority of the population to a small group of financial elites (less than 10 per cent of the population) arising from wasteful overpaying for financial products and services. The salaries, bonuses and profits paid out by the City of London exceeded the incomes needed to incentivise the supply of financial products and services in an efficient, competitive market by £680bn between 1995 to 2015.3

How does the UK compare with the US?

A study in 2016 using the same methodology found the US’s finance sector to have cost the US economy $22.3tn (£17.9tn) in lost economic output between 1990 and 2023 – equivalent to slightly above total US economic output in 2018.4 In comparison to the 2.5 years of lost British economic output, the costs imposed by hosting an oversized financial sector are more than two times greater for the UK than the US.

Finance curse

The report adds to growing evidence that the City of London extracts significantly more wealth from the rest of the UK economy than it contributes. Only 3.5 per cent of all business lending by UK banks in 2017 went to Britain’s manufacturing sector, while 60 per cent of all lending went to financial intermediation, ie financial intermediaries who channel funds between lenders and borrowers.5

The data also provides support for the idea that the UK suffers from a “finance curse”: the condition where a financial sector becomes predatory and harmful to the economy that hosts it after it grows beyond a useful size and role. The subject of an upcoming book by tax haven and financial-centre expert Nicholas Shaxson, the finance curse involves the crowding out of other economic sectors and shaping of laws and social norms to suit the interests of the finance sector.

Professor Andrew Baker, co-author of the report and Professorial Fellow at the University of Sheffield, said:

The ‘too much finance’ problem has been identified in previous studies. For the UK, the numbers are powerful and hint at a deep underlying problem of misallocation and crowding out of the economy by the financial sector. UK economic strategy in a post-Brexit world needs to make addressing this the central challenge, recognising that where finance is concerned, more can sometimes be less, and less could be more.”

Nicholas Shaxson, author of the new book The Finance Curse: How Global Finance is Making Us All Poorer, said:

“The fallacy that we need to give the City of London a free pass so Britain can prosper as a nation has made us all poorer.

“The City of London likes to describe itself as the goose that lays Britain’s golden eggs, contributing jobs and tax revenues and export surpluses. But in reality, the costs of an oversized financial sector overwhelm these benefits. The City is in fact a different bird: a cuckoo in the nest, crowding out and killing other sectors which could have made Britain more prosperous.“

John Christensen, a director at the Tax Justice Network who helped co-develop the finance curse framework, said:

“This new evidence overturns the entrenched orthodoxy that what is good for the City of London must be good for the rest of Britain. For decades City interests have been inflicting a finance curse on the UK economy, inflating the exchange rate, slowing growth of the productive sectors, and lobbying governments into deregulating financial services, which led directly to the 2008 banking crisis. UK productivity has fallen dramatically behind most EU member states6, and excess household and corporate debt is holding back growth.

The good news is today’s research confirms we can and should rein in the City’s harmful excesses. Loosening the City’s leaden grip on our economy will free up our local businesses and hardworking citizens to prosper and flourish. Reducing the size of Britain’s financial industry by strengthening regulation, increasing taxes, and introducing a financial transaction tax, would serve Britain’s long-term interests. Enforcing transparency measures on Britain’s offshore secrecy jurisdictions would also reduce London’s role as a money-laundering centre.”

The Tax Justice Network is calling on the UK government to:

  • Create a UK super regulator responsible for policing financial risks, tackling money-laundering and all variants of financial crime
  • Ensure senior bankers face custodial sentences when their banks are culpable of financial crime
  • Implement tax transparency measures
  • Introduce an across the board Financial Transaction Tax of 3 per cent to deter speculative trading
  • Raise the Corporate Income Tax rate to 25 per cent (removing the majority of reliefs)
  • Strengthen HM Revenue & Customs capacity to tackle tax avoidance
  • Introduce smart capital controls to protect the economy from harmful inflows and outflows of capital

– ENDs –

Link to report:

Contact: Mark Bou Mansour, Tax Justice Network Communications Coordinator, email: [email protected] mobile: 07562 403078

Notes to Editor:

  1. A new report The UK’s Finance Curse? Costs and Processes reveals that the UK has suffered a £4.5 trillion cumulative cost in lost economic output from 1995-2015, equivalent to roughly 2.5 years of the average GDP across the period. The costs of this wasteful overpaying for financial products and services are not added to the total £4.5tn cost to the UK economy because some of these costs are incurred overseas.
Cost (billions)Per cent of 2015 GDP
Misallocation costs£2,700147.3%
Crisis costs£1,80098.3%
Excess profits£40021.8%
Excess compensation£28015.3%
Total (excluding excess costs)£4,500245.6%


  1. The research defines misallocation costs as the price of diverting resources away from non-financial activities and into finance through lost productivity and lower investment of skills and capital in R&D intensive areas in particular. Misallocation can take at least three forms:
    • Harmful financial agency: conscious intentional financial allocation decisions that result in short termism and rent extraction.
    • Structural gravitational pull: largely unintentional brain drain and rent attraction caused by the presence of an extensive financial infrastructure.
    • Unintended distortionary price spillovers: eg Dutch disease – exchange rate and property price inflation that impedes alternative tradable sectors and exports.
  2. Excess profits and compensation are excess incomes that operators and investors in the financial sector receive over and above the incomes they would need in order to induce them to supply their financial products or services in an efficient, competitive market. The costs of this wasteful overpaying for financial products and services are not added to the total £4.5tn cost to the UK economy because some of these costs are incurred overseas.
  3. A 2016 report title Overcharged: the High Costs of High Finance by two of the authors of The UK’s Finance Curse? Costs and Processes report, Professor Gerald Epstein of the University of Massachusetts and Juan Montecino of Columbia University, estimated that the United States would have suffered a cumulative $13-23 trillion in lost economic output from 1990-2023, as a result of its financial sector having grown beyond its useful size and roles. The report is available here:
  4. Bank of England, 2 – Industrial analysis of monetary financial institutions’ lending to UK residents, 31 December 2017



Bank of England data setSectorPercentage of business lendingLending in all currencies
(£ equivalent)
AgricultureAgriculture1.5% £18.29bn
FishingFishing0.0% £314bn
MiningMining0.6% £7.791bn
ManufacturingManufacturing3.5% £43.043bn
Electricity gas waterUtilities1.4% £17.727bn
ConstructionConstructions2.7% £33.320bn
Wholesale and RetailRetail4.2% £51.922bn
Accommodation + food servicesHotels etc2.1% £26.356bn
Transport, Storage and CommsTransport2.4% £29.371bn
Real estate + professional servicesReal estate15.0% £184.718bn
Public admin and defencePublic admin1.0% £11.724bn
EducationEducation0.8% £10.310bn
Human Health + Social WorkHealth1.6% £19.902bn
Recreational, personal, community serviceRecreation0.8%£10.035bn
Financial intermediation (excluding insurance, pensions)Finance29.5% £362.260bn
Insurance and pensionsInsurance, pensions3.2% £39.378bn
Auxiliary to financial intermediation (eg central clearing)Auxiliary finance29.5% £362.874bn


  1. OECD data on GDP per hour worked shows that the UK lags behind other EU countries:
  2. The Tax Justice Network did not contribute to The UK’s Finance Curse? Costs and Processes The Tax Justice Network began developing the concept of the ‘finance curse’ back in 2013, with John Christensen and Nicholas Shaxson, in a 2013 report:
    The UK’s Finance Curse? Costs and Processes report is the latest research development in a longer-running theme.


The report constructs a path, or trajectory, the economy would follow if the financial sector was optimal in terms of size and operation, then effectively measure the gap between this hypothetical path in a given year, and the line or path actual GDP takes in that year, to arrive at aggregate figures of misallocation costs across the time period 1995-2015. The optimal size and operation of the financial sector and misallocation costs are derived using established data and cross-country empirical analysis developed in the ‘too much finance’ literature.

Another hypothetical line considered is the trajectory GDP would take if there were no finance. In this case, the line would be expected to be substantially lower than actual GDP, illustrating that finance aids growth up to a certain point, but starts to hamper economic performance when it goes past that point. The gap between actual GDP and the optimal trajectory derived from the ‘too much finance’ literature data is referred to as a net cost at the margin. In this respect, what we are measuring is the cost of having too “big a financial sector” (due to misallocation) compared with having the “optimal” financial sector, over a period of time.

About Sheffield Political Economy Research Institute (SPERI)

SPERI is an interdisciplinary research institute at the University of Sheffield that aims to bring together leading international researchers, policy-makers, journalists and opinion formers to develop new ways of thinking about the economic and political challenges posed for the whole world by the current combination of financial crisis, shifting economic power and environmental threat.

About the Tax Justice Network

The Tax Justice Network is an independent international network, launched in 2003. It is dedicated to high-level research, analysis and advocacy in the area of international tax and financial regulation, including the role of tax havens.

The Tax Justice Network maps, analyses and explains the harmful impacts of tax evasion, tax avoidance and tax competition; and supports the engagement of citizens, civil society organisations and policymakers with the aim of a more just tax system.