The City cannot see Keir Starmer for what he really is
As an election draws closer, one point is certain: Sir Keir Starmer looks destined to become prime minister very soon, with the increasingly credible Rachel Reeves his chancellor.
Dire inflation figures this week and a nervous bond market pushing up borrowing costs and scuppering any chance of a sustained economic recovery, mean a probability is slowly turning into a certainty.
Sure, plenty of people in the City might be perfectly relaxed about that.
They have had enough of a government marked only by ineptitude and infighting, which has lacked the courage to reform the public sector, and deregulate the private sector, and which has failed to match the ambition of the industrial strategies created in the United States and Europe.
Even so, the UK’s financiers are still woefully unprepared for an incoming Labour government.
From changes to the tax on private equity, to forced investment by pension funds, to a clampdown on takeovers, to a possible wealth tax, anyone who thinks they are in for a finance-friendly, fiscally responsible re-run of the early Blair years is in for a rude awakening.
Labour is going to be a huge threat to the City – and no one is ready for that yet.
If Labour sweeps to power next year, there will be lots of weeks when, with hindsight, that outcome was inevitable.
The partygate scandal, perhaps, the chaotic ending of the short-lived premiership of Liz Truss, or the steep rises in taxes imposed by Jeremy Hunt as chancellor will all be significant milestones.
Even so, the final week in May will definitely be on the list.
With the bond markets losing confidence in the UK, with gilt yields rising, and with the Chancellor warning that there may have to be further increases in interest rates even if it causes a recession, the outlook for the next year is bleaker than ever.
With the economy shrinking, the tax burden at a 70-year high, and living standards falling at the fastest rate in two generations, the party has almost nothing to show for 13 years in office. A likeable and competent prime minister is not going to change that.
The City does not care much anymore. Whatever enthusiasm it may have once had for the Conservative Party has long since evaporated.
In power, the Tories have been chaotic, disorganised, divided, and often incoherent. They have taken the UK out of the European Union with little idea how to re-invent the economy, they have lost control of the public sector, and they have squandered the reputation for stability and lowish taxes that were about the only things the UK had going for it as a location for investment.
It is hard to see why anyone would mourn their defeat.
Here’s the problem, however. If the City thinks it is going to see a repeat of the early Blair-Brown years, with lots of lucrative work from a government that was in Peter Mandelson’s famous phrase “seriously relaxed about people getting filthy rich”, then it has badly mis-judged the nature of the incoming administration.
In reality, Labour’s tax and regulatory agenda is going to hit the City hard. Plans for a new tax regime for the private equity industry that now controls vast swathes of the British economy are all but certain.
“Carried interest” as the shares offered to partners are known will be taxed at the full 45pc rate, and there could be punishment for the whole industry if debt repayments are no longer counted as tax deductible.
The non-doms will face huge tax rises.
There is talk of forcing pension funds to invest in a state-backed scheme for putting money into British start-ups, despite the number of failures backed by Sunak’s Future Fund reminding everyone how bad the Government is at picking winners.
And it is hard to understand why the City has not yet taken on board the inevitably of a wealth tax – perhaps re-badged as a “green wealth tax” as a report for the French government cleverly labelled it – given how desperately short of money to spend an incoming Labour Chancellor will inevitably find themselves.
On top of all that, expect a clampdown on takeovers. The French telecoms entrepreneur Patrick Drahi last week increased his stake in BT to 25pc, and while a full offer for the company is officially denied, if one is going to be made it will have to be done quickly.
A far more protectionist Labour government will almost certainly block a takeover.
The Czech billionaire Daniel Kretinsky will have to decide whether he wants to buy the whole of Royal Mail, or take his profits while he still can, since it is hard to see the unions allowing a Labour business secretary to nod that one through.
There are plenty of media mergers that will have to be completed in the next few months if they are to escape the scrutiny of a government that will be far tougher on regulation of the sector.
If you want to sell a football club such as Manchester United, Liverpool or Tottenham Hotspur, you might want to get it done before the next transfer deadline since Labour may well bring the game under far stricter control.
We can expect to see a lot more takeovers rushed through over the next few months as the City starts to prepare for a change of government. We can expect to see the non-domiciled bankers switch to a different location, as well as a few of the mega-rich tech entrepreneurs and hedge fund managers nervous of a wealth tax.
And we can expect to see many of the private equity houses to start switching their assets elsewhere, and even ditch them entirely in the UK, as they work out the consequences of higher taxes. And yet, in reality, the City is still woefully behind the curve.
A Labour government is now all but inevitable – and the financial sector has hardly even begun the hard work of working out what that will mean.
