By Sinead Cruz and Hugh Jones
LONDON (Reuters) – Britain’s financial sector has begun to embrace Labour’s pro-business initiatives and pledges of stability and support, but many in the City of London remain wary that it could be targeted to shore up Britain’s strained public finances in the future.
Under its leader Keir Starmer, Labour — which is expected to win Britain’s election next Thursday — has been working hard to woo the City of London, knowing that its plans to boost economic growth will need a big dose of private capital.
At the last election in 2019, Starmer’s predecessor, Jeremy Corbyn, put forward a radical manifesto to boost public investment by raising taxes on corporations and the rich, leading to Labour’s worst result since the 1930s.
“The most important change is that there has been a significant shift in Labour’s mindset towards the city in the last few years,” William Wright, managing director of New Financial think tank, told Reuters.
“This is reflected in the strong sense of continuity in ongoing reforms in capital markets and pensions,” Wright said.
Labour, which is set to appoint former Bank of England economist Rachel Reeves as Britain’s finance minister, has backed the Conservative government’s post-Brexit “Edinburgh reforms” aimed at protecting the city’s global competitiveness.
The party also promised to review the pensions and savings industry, which could help Britain’s capital markets as well as boosting people’s financial resilience.
But there is also speculation about changes to the way capital gains and wealth are taxed, as well as Reeves’ plans to change the way private equity is taxed, which is likely to have a strong impact.
Michael Moore, chief executive of the private equity industry body PVCA, said Labour had, however, shown a willingness to back its “pro-business music by getting involved in the substance”.
Reeves has pledged to end the “loophole” that allows part of private equity profits to be taxed as capital gains, rather than at the higher income tax rate, but last month he told the Financial Times that favourable tax treatment would continue in cases where fund managers put their capital at risk.
Optimism after Brexit
Many senior bankers and financiers in Britain are taking the prospect of a left-leaning Labour government lightly after the blow to Brexit and the impact on the UK government bond market in September 2022 from then-Prime Minister Liz Truss’s plans to cut unfunded taxes.
“The industry has had positive and constructive conversations with Labour since 2019,” said Miles Selleck, CEO of TheCityUK, which represents the UK’s financial sector globally. “If they win, there will be very few new governments that come into power that are more informed about what our ecosystem needs to help act as an engine of growth and competitiveness.”
The Labour Party did not respond to a request for comment.
The damage to investor confidence and the leakage of financial services activities into the EU caused by Brexit – arguably the most lasting legacy of the Conservative Party’s 14 years in power – will be difficult for Labour to repair.
The French central bank said last year that transactions between French-based financial services companies and the rest of the world reached a record €10.4 billion in 2022 – double the volume seen at the time of the Brexit vote in 2016.
According to figures published by CityUK in January, the UK’s share of cross-border bank lending was 16% in 2016, but that had fallen to 14% by the end of the second quarter of 2023.
Meanwhile, Amsterdam has overtaken London to become Europe’s largest stock trading hub since trading of euro-denominated shares by EU investors in Britain stopped on December 31, 2020.
Seeking certainty and stability
Starmer has repeatedly made clear that rejoining the single market, which is necessary to restore direct access to the EU, is a red line he will not cross.
Many market participants simply want to see the financial sector reforms already agreed be properly implemented under a Labour government, to protect the huge contribution the industry makes to state coffers.
A study by PricewaterhouseCoopers for the City of London Corporation and TheCityUK published in May estimates that the total tax contribution of the financial and related professional services industry will be £110.2 billion ($140 billion) in 2023.
This is equivalent to 12.3% of total UK tax revenue, more than the UK government’s education budget, or more than half the health budget.
Impending changes to Britain’s rules on stock market listings are designed to bring in more large initial public offerings, which could include China-based fast-fashion retailer Shein and other similar deals that bring big paydays for those involved.
The Financial Conduct Authority is due to publish its changes to its lists after the election, which could prompt a wave of institutional activity from the end of July.
The UK economy emerged from recession faster than previously thought in the first three months of this year, but the broader economic backdrop remains fragile.
The UK’s public debt is high, almost equal to GDP, and growth prospects are tepid, leading analysts to conclude that taxes will inevitably rise to support health and other services, making the financial sector a likely target.
“It’s actually quite simple, companies want certainty,” said Naresh Agrawal, associate director of policy and technology at the Association of Corporate Treasurers.
A Labour election is unlikely to lead to a radical change in the direction of the UK stock market as valuations are low compared to Wall Street, M&G Investments said in a note to clients.
But New Financial’s Wright warned that Labour may be more extreme in government than it was in opposition, a view echoed by Samuel Gregg of the American Institute for Economic Research.
“The city should realise that Labour is more left-leaning these days than it was under Tony Blair,” said Gregg, speaking of the New Labour stronghold of the early 2000s.
“This can only help make life more uncertain for the city under a huge Labour majority government.”
(1 dollar = 0.7844 pounds)