The City of London is the jewel in the crown of the British economy. In terms of other economic factors, Britain may only be a second-class power, in manufacturing, invisible trade or in research. As a European economic power, Britain ranks above Italy and about level with France. Yet in finance the City of London meets Tokyo or New York on level terms as a major player. The City of London earns the living of the United Kingdom. Without the City's earning power, Britain might dwindle into an insolvent dwarf, the Northern Rock of nations.

Great trading cities throughout history have been extremely rich, as London is now: in the ancient world, Athens or Alexandria; in the medieval world, Florence or Venice; in the modern world, Hong Kong or Singapore. Yet great business cities today are vulnerable. London developed as the political and economic centre of the largest empire in history. The empire no longer exists, but London survives, and indeed transacts more business than at the height of imperial power.

As London is so essential to the British economy, and so vulnerable to competition, national policy should be as helpful as possible. Anything that weakens London's international standing damages Britain. In the postwar period, redistributive Labour taxation, which at one point rose about 100 per cent on investment income, seriously damaged the City. Recovery only came in the 1980s, after the Thatcher Government ended exchange controls. Margaret Thatcher saved the City of London and that saved Britain's economy.

Some people in the Labour Party have always wanted to raise taxation - that is nothing new. Indeed, one can understand the socialist argument. Earnings in the City can be very high; Labour, except under Tony Blair, has always been in favour of taxing the rich. Mr Blair wanted to work with the rich but he was an exception.

For the Revenue, the argument is somewhat different. As technicians, Treasury officials often resent concessions that allow foreign entrepreneurs to make lightly taxed fortunes in London. They are reluctant to accept the argument that businessmen will take their businesses to other centres if they are heavily taxed in London.

Alistair Darling, the Chancellor, now proposes a new system of taxation for the “non-doms”; these are foreign businessmen who live and work in London but do not have a British domicile for tax purposes. The danger is that businessmen will leave London and transfer their businesses to other centres that offer a much better tax deal. There is evidence that this process has already begun. Foreigners, who make money for Britain, are planning to leave London.

Mr Darling's new tax proposals include a £30,000 tax on each qualifying non-dom in Britain, and changes to tax on trusts and capital gains. If these proposals become law, foreign investors and businessmen will leave, particularly for Monaco, which is keen to welcome them, and Switzerland. However, I would be even more worried about the businesses that will never come to Britain than about those that will leave.

Before big global businesses decide where to locate their offices or factories they consider all their options. In the last 20 years, the Republic of Ireland, with low business taxes, has been a particularly attractive place for business. As a result, Ireland has become a richer country than England, something that had not happened since the 5th century.

International businesses choose their locations not only on existing costs and tax rates, but also on estimate of future costs and taxes. Their boards thought, correctly, that Mr Blair believed in entrepreneurial competition and wanted to keep British taxes as competitive as possible. They had thought the same of Mrs Thatcher. They felt there were unlikely to be unpleasant surprises from either prime minister, but they have never trusted Gordon Brown in the same way, though they hoped that Mr Blair would not allow Mr Brown to adopt anti-business policies. When Mr Brown became Prime Minister, businessmen felt less safe, but were prepared to wait and see. Now Mr Brown himself and Mr Darling are introducing this new regime for non-doms, even though it will cover a large proportion of executives of all international businesses, including banks.

Most businessmen understand how the global system works, and how it can be made to work for Britain's national advantage. They understand that there is a market for global services, including the services that a nation can provide. They know that everyone has to compete inside the market. For Britain, the existence of the City of London has been a great competitive advantage, which has offset other failures or weaknesses.

Not all politicians understand these basic relationships; those who do not become a menace when they are in power. Britain has to be competitive in terms of costs and taxes if we are to attract new international business or keep the businesses that are already here. Non-doms have helped us in this task; they have increased the real wealth of Britain; they have added to our ability to compete.

If international businessmen become convinced that a Labour government is returning to the old ways, when Britain was overregulated, overtaxed and underproductive, they will begin to withdraw from Britain. We shall be poisoned as a site for business.

The image of the City of London will be one of decline. Can we afford this? Can we afford Alistair Darling?

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