UK Financial Sector Braces for Labour's Pro-Business Promises Amid Election
By Sinead Cruise and Huw Jones
LONDON (Multibagger) - The UK's financial sector is cautiously optimistic about Labour's pro-business promises and commitments to stability, but some remain concerned about potential tax hikes to support Britain's stretched public finances.
Under leader Keir Starmer, the Labour Party—expected to win the upcoming UK election—has actively engaged with the City of London, recognizing that private capital will be essential for their economic growth plans.
In the 2019 election, Starmer's predecessor Jeremy Corbyn proposed a radical manifesto to increase public investment by raising taxes on corporations and high earners, leading to Labour's worst result since the 1930s.
"The most significant change is Labour's shift in attitude towards the City in recent years," said William Wright, managing director of think-tank New Financial. "This is evident in their continuity with ongoing capital markets and pension reforms."
Labour, with Rachel Reeves, a former Bank of England economist, anticipated to become Britain's finance minister, has supported the Conservative government's post-Brexit 'Edinburgh Reforms' aimed at preserving the City's global competitiveness. The party has also pledged to review the pensions and savings industry, potentially bolstering both capital markets and public financial resilience.
However, there is speculation about changes to capital gains and wealth taxes, as well as Reeves' plans to alter private equity taxation, which could have significant impacts.
Michael Moore, chief executive of BVCA, a private equity industry body, noted Labour's willingness to combine pro-business rhetoric with substantive engagement. Reeves had previously vowed to close a "loophole" allowing private equity earnings to be taxed as capital gains rather than at higher income tax rates. However, she recently indicated that favorable tax treatment would continue when fund managers invest their own capital.
Sanguine After Brexit and Truss
Following the disruptions from Brexit and the bond market turmoil caused by former Prime Minister Liz Truss's unfunded tax cuts in September 2022, many top UK bankers and financiers are more accepting of a potential left-leaning Labour government.
"The industry has had positive and constructive discussions with Labour since 2019. If they win, few new governments will have entered office better informed about what our ecosystem needs to act as a growth and competitiveness dynamo," said Miles Celic, chief executive of TheCityUK, which represents the UK financial sector globally.
The Labour Party did not respond to a request for comment. Repairing the damage to investor confidence and the leakage of financial services to the EU caused by Brexit—arguably the most enduring legacy of the Conservative Party's 14 years in power—will be challenging for Labour.
France's central bank reported last year that transactions between French-based financial services firms and the rest of the world hit a record 10.4 billion euros in 2022, double the volume seen at the 2016 Brexit vote. According to CityUK, the UK's share of cross-border bank lending fell from 16% in 2016 to 14% by the end of Q2 2023. Amsterdam has also overtaken London as Europe's top share trading venue since euro-denominated share trading by EU investors ceased in Britain on Dec. 31, 2020.
Seeking Certainty and Stability
Starmer has repeatedly emphasized that rejoining the single market, crucial for the City to regain direct EU access, is not an option. Many market participants want the financial sector reforms already agreed upon to be properly implemented under Labour to protect the industry's significant contribution to state revenues.
A PwC study for the City of London Corporation and TheCityUK estimated the total tax contribution of the financial and related professional services industry at 110.2 billion pounds ($140 billion) in 2023, equivalent to 12.3% of total UK tax receipts—more than the education budget or over half the health budget.
Imminent changes to stock market listing rules aim to attract more high-profile initial public offerings, potentially including China-founded fast-fashion retailer Shein, among other lucrative deals. The Financial Conduct Authority is set to publish its listings revamp post-election, potentially spurring corporate activity from end-July.
Britain's economy exited recession faster than expected in the first quarter of this year, but the broader economic landscape remains fragile. With UK public debt nearly equivalent to GDP and prospects of sluggish growth, analysts predict inevitable tax hikes to support health and other services, making the financial sector a likely target.
"Business wants certainty," said Naresh Aggarwal, associate policy & technical director at the Association of Corporate Treasurers. M&G Investments noted in a client note that a Labour victory is unlikely to fundamentally alter the direction of the UK equity market, where valuations are depressed compared to Wall Street.
However, New Financial's Wright warned that Labour might be more radical in government than in opposition, a sentiment echoed by Samuel Gregg of the American Institute for Economic Research. "The City should recognize Labour is more left-leaning now than during Tony Blair's era," said Gregg. "This could increase uncertainty for the City under a Labour government with a substantial majority."
Simplified Analysis and Impact
What This Article Is About: This article discusses the UK's financial sector's cautious optimism and concerns about the Labour Party's potential victory in the upcoming election. Labour has made promises to support the financial sector but could also introduce tax changes that may affect businesses and investors.
How It Can Affect Lives and Finances:
- Private Capital: Labour's economic plans require private investment, which could mean more opportunities for investors.
- Tax Changes: Potential changes to capital gains and private equity taxes could impact how much investors and businesses have to pay.
- Economic Stability: Labour's approach to economic reforms could provide more stability, which businesses crave.
- Public Finances: With high public debt, taxes might increase, affecting disposable income and investment returns.
Breaking It Down:
- Pro-Business Promises: Labour wants to attract private capital for economic growth.
- Tax Speculations: Possible new taxes on investments could affect returns.
- Stability Needs: Businesses and investors want predictable policies.
- Brexit Aftermath: Labour needs to fix issues caused by Brexit, affecting the financial sector's global position.
In short, if Labour wins, expect some changes in taxes and regulations that could impact your investments and business operations, but also potential stability and growth opportunities in the UK financial market.