Financial centre, fiscal crunch

Tuesday, November 11

Financial centres such New York and London can expect significant economic impact from the global contraction of the financial sector. The fiscal effects on New York City and New York State will be particularly acute, due to their heavy dependence on tax revenue derived directly or indirectly from financial sector performance.

New York.

The most pronounced impact of the financial crisis has been faced in the states that comprise the New York metropolitan area -- especially New York and New Jersey -- and New York City itself (which despite recent decentralising trends, remains the centre of the US financial industry, and more significantly, a cornerstone of the city, state, and regional economy).

Financial sector shrinkage will sharply diminish New York State and City tax revenues (which comprise a combination of income, consumption, and property taxes):

• Bankruptcies and mergers stemming from the current crisis have led to significant financial sector job losses. Even stronger firms such as Goldman Sachs have shed positions.

• Paterson suggested in late October that Wall Street job losses would top 45,000, while other sources estimate these losses may reach as high as 80,000; total private sector job losses in New York state could reach 160,000.

• Jobs in New York City's finance, insurance, and real estate sectors account for about 1/3 of personal income earned in the city.

• The combined New York metropolitan area is expected to lose as many as 100,000 jobs in financial services. Other regional markets, such as the Boston area, also can expect significant job losses.

In addition, jobs in service industries that cater to the Wall Street economy -- such as restaurants and retail -- are also expected to experience declines. Moreover, other sectors, such as the media, have seen a sharp decrease in employment; Paterson has cited state projections that New York's unemployment rate will climb to 6.5%.

UK response.

The global credit crunch has also affected UK financial institutions:

• While financial sector job losses are expected to be more moderate in percentage terms than in the United States, the London-based financial sector may lose about 30,000 jobs in 2008, with 2009 figures expected to be at least one-third higher. These cuts stem from reduced performance rather than the recent increase in political and regulatory pressure.

• Although a wide reconsideration of the role of compensation structures in encouraging unnecessary risk taking is underway, some UK banks quietly have suggested that the impact of such discussions on 2008 bonus levels (below the senior executive level) will be minimal, though other independent estimates suggest bonuses may shrink by at least 50%.

• The knock-on fiscal effects of the credit crunch due to a shrinking real economy are also expected to be considerable. As in the US case, loss of lucrative financial jobs and slashing of bonuses will have knock-on effects in employment in retail and other service sectors, leading to the loss of one to two other jobs for every financial sector redundancy.

As the premier world financial centres, both New York and London will see serious fiscal consequences from the collapse of the financial sector. Neither centre is expected to weaken its current regulatory environment in order to attract more financial sector activity and employment from a shrinking global pool.