Jeremy Warner's Outlook: Twenty years after big bang, tax and red tape are still the things that get the City's goat

There's too much tax and too much regulation, the bulk of the latter made in Europe. That's the message many in the City will want to see pressed home on the Chancellor tomorrow, when he's scheduled to hold the first meeting of the newly created financial services task force, a forum of financiers to help ensure public policy is made conducive to maintaining London's dominant position in global capital markets.

Is there any reason for thinking the situation more urgent now than it has ever been? The day businessmen and financiers stop complaining about tax and red tape will truly be the day the world stops spinning. Tax and regulation have long been the only agenda that unites the business lobby, which in most other matters to do with public policy is a snakepit of rival interest. If business leaders were not complaining about these things, you would want to know why.

None the less, over the past year, these voices have grown stronger. With David Cameron's Tories trying to reconnect with traditional Conservative Party support in the City and the wider business community, the Government is being forced to take them seriously.

As ever, much of the evidence of legitimate grounds for complaint is arguable. The Financial Services Authority, Labour's biggest contribution to regulation of the City, is generally thought to have added to London's attractions as a financial centre, not damaged them. The same point cannot perhaps be applied to retail financial services, where many FSA and government initiatives seem to have proved the law of unintended consequences - well-intentioned regulation has succeeded in making a bad situation even worse.

However, this cack handedness does not appear to have spread to wholesale markets, the core part of the City's success story. Here, sensible, light touch, principled based regulation has underpinned the City's many other advantages. Nor is all that comes out of Europe obviously bad regulation.

The most recent example of it, the Markets in Financial Instruments Directive, is actually a rather sensible piece of single market legislation, which in some respects actually reduces the regulatory burden on financial services companies. It is the burden of having to comply with a growing weight of such regulation that businesses most complain about, rather than the regulation itself.

The evidence of uncompetitive and oppressive taxation is not exactly overwhelming either. Some aspects of City taxation, such as the tax treatment of non domiciled UK residents, is extraordinarily generous, to the fury of both their UK peers and their countries of origin.

And although Britain's overall tax burden grew more strongly than virtually everywhere else in Europe last year, as a proportion of GDP, it remains below that of all our main European competitors except Germany, Spain and Ireland. Many Americans wonder how on earth Britain keeps growing at all, given its high tax burden, yet by European standards, it looks perfectly reasonable. Britain fares less well on share of taxation form income and profits, where the proportion is indeed relatively high compared with leading competitors and growing. However, even here, the differences are perhaps too marginal to make much of a difference.

If Britain has become tax uncompetitive for business against rivals in Europe and elsewhere, how come the UK is still attracting record quantities of foreign direct investment? Even discounting the distortion of the Shell merger, which curiously counts as an inflow, foreign direct investment in the UK last year was only marginally below that of the US. The British business lobby may be threatening to desert these shores en masse, but everyone else seems desperately to be trying to get in.

It's obviously something of a paradox, perhaps explained only by the possibility that Britain's other attractions outweigh the tax disadvantages. None the less, these things tend to be on a long lead time, and it may be that Britain is still reaping the tail end benefits of reforms which happened quite some time back. Outside perceptions may lag the reality, which is more readily appreciated by the old hands. Despite some early cuts in the rate of corporation tax by Labour, it is now quite a lot higher than most other European countries.

Legitimate forms of tax avoidance, once tolerated by Revenue and Customers as a form of tax competition, are now aggressively targeted by the Treasury, which appears determined to collect every last penny of tax. Large, international companies make a particularly soft target in this regard. With reputations to protect, they cannot afford to be seen kicking against the Revenue.

As the City and business complain ever more loudly, the Chancellor is being hoisted on his own petard. He preaches the merits of tax competition as a rival vision to the tax harmonisation favoured by some Europeans, yet having been a beneficiary of it, the boot is fast transferring to the other foot.

If he cuts business taxes to compete, will the economy grow faster to compensate for the damage this does to the public finances? In the short term, probably not. Yet if he doesn't cut, the tax may seep away from him in any case. Wealth creators don't like paying taxes, period. The problem may not be as serious as it is sometimes painted, but if the Government wants the City to build on its successes, it must in some way address these issues head on.

British Energy: on the rack again

And the Government came so close to being up, up and away. After yesterday's news from British Energy - in effect the third profits warning in as many months - it is hard to see the Government can persist with plans to sell off the 65 per cent it holds for bailing the company out three or four years back. The precipitous 24 per cent plunge in the share price, also means the company will struggle to hold its place in the FTSE 100.

Fortunately for ministers, they never put a date on the intended share sale. That spares at least some embarrassment, though the date was widely assumed to have been this autumn. In any case, the amount that could now be raised is scarcely worth bothering with.

It could all have been so different. With wholesale electricity prices still riding high early this summer, the Government could reasonably have hoped to defray virtually all the £5bn of nuclear decommissioning costs it took onto its own books as part of the rescue. Today, hopes of insulating the taxpayer from these liabilities lie in tatters.

The bull case for British Energy lay in the belief that after years of underinvestment it could eventually improve the efficiency of its nuclear power stations to internationally competitive rates. Nuclear plants have exceptionally high fixed costs, so any period when they are not operational, for safety or maintenance purposes, is money down the drain.

Yesterday's news exploded any remaining hope of the now obsolete gas-cooled technology used in all but one of British Energy's plants ever achieving the efficiency levels of more modern, pressurised water reactors. The cracks and leaks that have appeared in AGR pipes now require "outages" so serious that British Energy will have to buy in power from the wholesale markets just to fulfil its contracts. At this stage the cost is largely guess work, but it could be perhaps as much as £200m off profits this year.

So much for British Energy. Does yesterday's news also put the kibosh on government plans for a new generation of nuclear power plants to replace the old ones. It certainly doesn't help. Any new nukes will of course be the latest technology, and therefore considerably more efficient than anything that has gone before. Even so, it remains highly unlikely, given the experience of privately owned nuclear capacity in this country, that the City could be persuaded to invest without some form of government subsidy or market subvention. An inconvenient truth, perhaps, but a rather important one which ministers seem determined to ignore as they grapple with their planned, nuclear White Paper.

j.warner@independent.co.uk

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