The banner said “Britain's Future” as aspiring prime minister Keir Starmer and chancellor Rachel Reeves made much of Labour being the party of business, when big hitters from the UK’s finance industry flocked to the Oval cricket ground in London, months before the general election.
Events like the Labour Business Conference set the scene months before the vote, as the leaders rubbed shoulders with the Labour Party’s top brass – now all senior ministers.
But this rapprochement between the City of London and the new Labour government has spent the summer quietly going off the boil.
Just how much this Labour government is behind business, and the City of London in particular, become as source of confusion, and quiet doubts are growing louder.
As share and bond traders, economists and fund managers start to return from their summer holidays, all eyes will be on two milestone events in the next eight weeks and how the new Labour government intends to approach them.
First, there’s the International Investment Summit which was promised in the run-up to the July election by the Labour Party to take place within the first 100 days of a new government. That’s due in mid-October, while the second event is Ms Reeves’s first budget, at the end of that month.
Samuel Gregg at the American Institute for Economic Research think tank, feels Mr Starmer’s government has a very different make-up to the first Tony Blair government of the late 1990s, and that the City of London should “should recognise Labour is a more left-leaning outfit these days”.
While the City’s fund managers are very keen for the new government not to be tempted to use the financial sector as a cash cow to be milked for tax revenues, there is a realism that the government is constrained by the tight public finances. Ms Reeves has already said the departing government left her with a £20 billion ($26.3 billion) plus black hole.
Sir Douglas Flint, the chairman of Abrdn, believes some incentives should be considered and is an advocate of scrapping stamp duty – the 0.5 per cent sales tax slapped on share transactions.
“There is general agreement that stamp duty is a factor in making it hard to build an investment culture in the UK and is an element in making UK markets less attractive competitively,” Mr Flint told The National. “But, of course, the UK’s fiscal position would require the tax foregone to be replaced somehow.”
Ms Reeves has been to the US and Canada to drum up interest for the summit, though so far has not announced any planned visit to the GCC. Attracting foreign direct investment is a key aim of the government, and creating the conditions within the UK economy for that to happen is a prerequisite.
Likewise, seeing through changes to the capital markets – something the former Conservative government launched in the Edinburgh and Mansion House reforms – is seen as crucial as well.
Doubts and fears
Eyebrows were raised when inflation-busting pay rises were agreed for train drivers, junior doctors and public servants. In order to pay for some of this, the government borrowed £2 billion more in July this year than in 2023, meaning that the £3.1 billion deficit was the highest for a July in three years and £3 billon higher than expected by the government’s spending watchdog, the Office for Budgetary Responsibility.
Analysts said this means the Chancellor would be tempted to raise capital gains tax and possibly the stamp duty on share trading in her October budget, something that would be bound to taint the currently cosy relationship between the government and the City of London’s Square Mile financial district.
“We still think that she will look to raise an additional £10 billion a year via higher taxes in the budget and increase borrowing by around £7 billion a year,” said Alex Kerr, UK economist at Capital Economics.
Early movement
However, some things are going the Square Mile’s way. Last month, the Financial Conduct Authority regulator loosened the rules regarding the rights of shareholders when companies float on the London Stock Exchange. The FCA said the rule changes would align “the UK’s regime with international market standards”.
Ms Reeves said the changes were a “significant first step towards reinvigorating our capital markets”.
Basically, the FCA’s move simplified listings and allowed for greater flexibility around voting rights, both of which were seen as a boost to the attractiveness of the London Stock Exchange as a place to float one’s company.
That step was important given the exodus of firms from London to the much larger pools of investment capital on the other side of the Atlantic, most notably illustrated by the departure of the British semiconductor maker, Arm, for New York.
The number of listed companies in the UK fell by about 40 per cent between 2008 and 2021, according to the UK Listing Review, and the big ones tend to be what are often referred to as “old economy” stocks – the likes of banks, oil majors and mining companies. At one stage a few years ago, tech giant Apple had a larger market capitalisation than the FTSE 100 companies put together.
Those old economy shares may have made the London market more stable and less volatile than others, but investors are still drawn to the tech and life sciences companies. Analysts like Chris Beckett, head of equity research at Quilter Cheviot believe money will seek out growth opportunities every time, and as such “if a business wants to achieve an attractive valuation, it too will go to America”.
Nonetheless, some senior figures in the Square Mile are applauding the Labour government’s performance so far, and business confidence in the UK economy is slowly building.
John Ions, chief executive of Liontrust feels that falling inflation, further cuts to interest rates and better economic growth should encourage international investors to “return to the UK and boost capital flows to the stock market”.
Riskier times
Many fund managers in the Square Mile feel certain rules governing risk are holding back the potential for growth.
Recently, Chris Hayward, policy chairman of the City of London Corporation, said that for too long the UK has focused too much on trying to eliminate risk entirely, a move which in terms of growing investments is counterproductive.
“Risk is necessary for innovation, for investment, for economic growth,” he wrote in City AM.
“A responsible, risk-based culture – such as pension funds investing in British start-ups – is key to delivering strong economic growth.”
In recent years, direct contribution pension funds have been deterred from employing slightly riskier investment strategies, because of the cap on the amount of costs they can incur. There was also a general move out of equities and into bonds by UK pension funds as part of a de-risking strategy.
But it’s no coincidence that Ms Reeves recently visited Canada where many smaller pension funds have consolidated into “superfunds” capable of investing serious sums of money in infrastructure projects that deliver returns over long periods of time.
She wants pension funds to “learn lessons from the Canadian model and fire up the UK economy”.
Some were simply waiting for the reins to be relaxed. Earlier this month, Phoenix and Schroders launched their Future Growth Capital co-investment fund, which will invest up to £20 billion in the UK over the next decade.
“The question will be to what extent this might involve new incentives to invest in UK markets or voluntary commitments by large schemes that might build on the previous government’s Mansion House Compact where schemes committed to invest at least 5 per cent of their assets in UK growth companies by 2030,” Paul Geddes, the chief executive of Evelyn Partners, one of the UK’s largest wealth management groups, told The National.
“The government appears to have ruled out mandated allocations to UK assets, which in our view would have been an unwelcome interference in capital allocation.
“If investors can see a significant source of additional liquidity for the UK market coming from domestic pension schemes, this could well trigger greater confidence in UK equities from international investors,” he added.
Growth engine
The UK’s financial services sector contributed £110.2 billion to the Treasury’s coffers in taxes in 2023, which amounted to 12.3 per cent of Britain’s total tax revenues and represented more than the entire budget for education.
According to number crunching performed by PwC, the sector is also almost 2.5 times as productive as the rest of the UK’s economy with output per hour at £97.30 in 2022. On average, output per hour for the economy as whole that year was £40.50.
Recent research by the Centre for Policy Studies claimed that the typical UK pension pot would be £6,000 bigger if stamp duty on shares was scrapped.
The think tank said it would also improve long-term economic growth by up to 0.7 per cent, and give business investment a much-needed £6.8 billion boost.
Because Ms Reeves limited the government’s tax raising options with pre-election pledges not to increase income tax, national insurance, corporation tax or VAT, many analysts think she’ll have little choice but to tinker with both capital gains and inheritance taxes.
Indeed, Ms Reeves had vowed to end a “loophole” that allows a portion of private equity earnings to be taxed as capital gains, rather than at the higher income tax rate.
For Mr Geddes large hikes in capital gains tax would “send the wrong signal, especially as the new government was elected on a manifesto that focused on the message of supporting wealth creation”.
“If we want people to set up businesses and to take the risks of investing, then it is important to ensure that the level of taxation on the gains they might make does not become a deterrent,” he told The National.
“HMRC’s own modelling suggests that raising CGT would have a negative impact on tax receipts, as people would sit on assets in the hope of a future policy change.”
'Actions, rather than words'
In most years, the chancellor has laid out the government's policy plans regarding the City of London at the annual Mansion House speech, which in recent times has been delivered in June or July.
This year's Mansion House speech was due to happen in mid-July, but was postponed after Labour won the general election earlier that month. As yet, the Treasury has yet to announce when Ms Reeves will deliver the speech.
But essentially, the City of London has heard the Labour Party talk the talk, both in opposition and now in government. What those who direct the trillions of pounds of investment money in the UK are looking for now is how the new government walks the walk.
“The fact that the current government has growth as a key priority sends a message to all market participants, including regulators, that it will be helpful where it can in policy settings,” Mr Flint told The National.
“The market will look for and respond to actions, of course, rather than words.”
