ALEX BRUMMER: Chancellor Rachel Reeves irritates Square Mile

Rachel Reeves has made a spectacular start as chancellor. She wasted no time in outlining her growth agenda, identifying a perceived black hole in public finances and crossing the Atlantic to make friends with Wall Street and Canadian investors. She is showing resilience after a grueling election campaign.

With the assistance of His Majesty’s Treasury, he prepared himself well for the position.

The Civil Service was kind enough to remodel the Chancellor’s bathroom in honour of the country’s first woman to hold the post. Before the election, Reeves reached out and built alliances in the City and the business world. Plans are already in the works for an International Investment Summit to be held on 14 October, two weeks before his first budget.

It is impossible to criticise Reeves for putting growth at the top of the agenda. It would be fantastic to see her succeed. The disruption on the streets of the UK in recent weeks illustrates the scale of the task ahead. Social cohesion in former industrial centres is fractured and abandoned city centre shops have been converted into cannabis farms. The soon-to-be-strengthened Office for Budget Responsibility noted in the July 2023 fiscal risks report that a benefits system, which rewards ill health more than unemployment, needs reform.

Despite the disparity in social conditions, Reeves has a stronger economic legacy than he might have hoped. Growth in the first two quarters of the year has surprised to the upside and has prompted analysts to rush to upgrade consensus forecasts, which are now projected at 1.5% or more. Surveys covering all sectors of the economy are positive. And the Bank of England has finally acknowledged that leaving interest rates too high for too long, when inflation has hit the 2% target, was foolish.

Reeves’ pronouncements do not meet with universal approval.

Some of the Square Mile’s big players are deeply disappointed and fear that London as a financial centre could lose its appeal if capital taxes are imposed. Much of the same script was heard after the Brexit referendum and nothing serious happened.

Companies involved in the fossil fuel sector are exasperated by policies that will destroy jobs and energy security.

In the City, the political stability provided by a strong Labour majority, after the ups and downs of the Conservative government, is an advantage.

But there is disappointment at the dishonest content of Reeves’s audit of public spending and the subsequent backing of private equity and wealth taxes. The concocted drama about cheating and a £20bn hole in the public finances impressed no one. Reeves’s economic credibility was undermined. It was a reminder that she was the “cut-and-paste” shadow chancellor when she “wrote” her book Women Who Made the Modern Economy. It is strange that a leader who preaches growth has taken the axe to critical road projects and R&D spending on artificial intelligence. The attack on older people stings.

Among the big dangers looming is the announced attempt to tax private capital. The idea that an elite of some 2,550 tycoons should enjoy special tax status, using the “carried interest” loophole (taxing capital gains rather than income), seems outrageous. Indeed, this paper is highly critical of the trend towards public privatisation which has just seen investment platform Hargreaves Lansdown undergo a takeover by a consortium headed by CVC.

Private equity tycoons are highly mobile. From their lairs in Mayfair, central London, they provide more than a million jobs in the UK and are responsible for a network of investment banking, legal, accounting and other advisers.

They are an important part of a city revenue machine that will rake in £100bn in taxes by 2023. Dismantling an industry that generates tens of billions to raise an extra £500m in taxes is just plain stupid. It comes on top of the tourist tax, the VAT on foreign shoppers, that is doing so much damage to retail.

Penalizing businesses may be a good idea for the back bench, but it is an arrow pointing in the face of Reeves’ expansion plans.