The Finance Curse
Is Britain's most valuable industry also one of its most damaging?
In 2025, Britain's financial sector contributed £290 billion to the country's real GDP, marking roughly 11% of total output. It employs over a million people directly and in 2024 achieved a record trade surplus of $127 billion, making the UK the world's largest net exporter of financial services, all at a time when Britain's trade in goods has run deeply negative for decades. By any conventional measure, the City of London is therefore said by most to be one of the most valuable economic assets that the UK can possess. However, the scale of that contribution has increasingly raised a harder question of whether an economy built so completely around one sector is as strong as it looks.
Financial services represent one of the few areas where Britain retains global comparative advantage. London’s combination of legal infrastructure, time zone, language and accumulated expertise makes it a natural hub for international capital flows, FX trading and asset management in ways that would be difficult to replicate elsewhere. The sector’s tax contribution alone funds a meaningful share of public services and the ancillary industries it supports add further layers of high-value employment. On reading this, the appropriate policy response is to protect and expand the City’s position, which broadly describes the actions of British government across most of the past four decades.
The problem is that an oversized financial sector does not simply generate wealth but also reshapes the economy around itself in ways that can be quite damaging. The mechanism most economists point to mirrors what happens to commodity-dependent economies; when one sector generates exceptional returns, it pulls capital, talent and political attention toward itself and away from everything else. In oil-rich economies, this process inflates the exchange rate and makes other export industries uncompetitive. In Britain, finance has operated similarly, though the transmission channels are more varied and less obviously visible.
The most direct is the labour market. Finance pays exceptionally well relative to other graduate professions and that wage premium has a predictable effect on where talented people choose to direct their careers. When a physics graduate from a leading university can earn two or three times as much in derivatives trading as in engineering or research, the private incentive to switch industries is quite strong. Aggregated across decades and cohorts, the result is a persistent drain of analytical and technical talent away from the sectors such as manufacturing, technology and applied research, where returns are felt most broadly across the economy. Therefore, Britain’s relative weakness in these areas and its corresponding strength in financial services, is not coincidental.
The second channel runs through the credit system. Banks allocate capital and the composition of that allocation matters hugely for long-run economic performance. In 2017, just 3.5% of all business lending by UK banks went to manufacturing, while 60% went to financial intermediation, which refers to institutions lending to other financial institutions, meaning capital is circulating within the financial system rather than flowing into the productive investment that raises output and living standards. An economy that excels at trading financial assets but persistently underinvests in physical and human capital will tend to generate paper wealth without corresponding gains in real productive capacity, which is a reasonable description of Britain’s economic trajectory over the past thirty years.
These effects are further worsened by the exchange rate effect. Large and sustained inflows of foreign capital into the City, of which much is destined for financial assets and real estate rather than productive investment, have historically kept sterling stronger than it would otherwise be, making British manufactured goods more expensive abroad and imports cheaper at home. This is the same mechanism that hollowed out the industrial base of oil-exporting nations when commodity revenues flooded in, just operating through finance rather than natural resources. The deindustrialisation of the British Midlands and North from the 1980s onwards had multiple causes, but the sustained overvaluation of sterling driven partly by financial inflows, was one of them. Its regional consequences - the concentration of growth in London and the South-East alongside the stagnation of formerly industrial cities - have proved extraordinarily persistent.
This points to the deeper structural problem, which is that financial dominance and regional inequality in Britain are not independent phenomena. The City concentrates high wages, high property values and high-value employment in a relatively small geographic area, generating agglomeration effects that attract further investment and talent to the same location. Meanwhile, the sectors that historically provided well-paid employment across a broader geography have contracted, leaving many regions with weaker labour markets, lower productivity and thinner tax bases. The levelling-up agenda, in various forms under various governments, has attempted to address this imbalance but encouraging investment in northern cities is substantially harder when the returns to capital in London’s financial sector consistently outpace what can be earned elsewhere in the economy.
It is important to note however, that none of this amounts to an argument that Britain would be better off without a large financial sector. The export earnings, tax revenues and employment it provides are undeniably significant and instead, we should ask what size of financial sector is optimal, and whether Britain has long since passed that point. A financial sector that allocates capital efficiently and channels savings into productive investment does perform an extremely valuable function but one that has also grown large enough to systematically distort labour markets, crowd out productive lending, inflate asset prices and concentrate growth geographically can be said to be extracting far more from the economy than it contributes to it.
The difficulty for Britain now is that decades of financial dominance have left the economy so deeply shaped around the City that successive governments are left fearful that shrinking or heavily regulating the sector could itself trigger economic decline.
By Navika Mehta
https://commonslibrary.parliament.uk/research-briefings/sn06193/
https://www.opendemocracy.net/en/resource-curse-or-paradox-of-poverty-from-plenty/
https://financecurse.net/research/who-are-uk-banks-lending-to/
https://www.hks.harvard.edu/sites/default/files/centers/mrcbg/files/198_AWP_final.pdf
https://www.tandfonline.com/doi/full/10.1080/21582041.2023.2282161
https://www.tandfonline.com/doi/full/10.1080/00343404.2024.2393672
