Chancellor material?: Rachel Reeves
Much of the country will have little respect for the City of London, considering it an amorphous entity populated by overprivileged and overpaid financiers.
They may be right. But the inescapable truth is that it is the most productive and remunerative part of the UK economy.
Together with legal and other professional services, it employs 2.5 million people nationwide, produced £278 billion of economic income in 2023 (approximately 12 per cent of GDP) and generated £100 billion in revenue prosecutors.
Yet anyone scanning the Labour manifesto would be hard pressed to find any references to this driving force of the nation’s prosperity amid platitudes about “change”, restored economic stability and a new deal for workers.
It is not uncommon for the Square Mile to be ignored. In the run-up to and after the Brexit referendum, the Conservatives felt that the financial community could look after itself.
An inordinate amount of time was devoted to the motor industry, agriculture and fishing. Finances received little attention. It turned out to be a shrewd decision, as the City’s menacing exodus to Paris, Frankfurt and Amsterdam was a trickle rather than a torrent. However, woeful share valuations caused by the negligence of UK long-term asset managers and stamp duty have stripped the FTSE 350 and sent IPOs overseas.
How will Labour deal with the City, if elected? Rachel Reeves has been at pains to calm nerves. She recognises, from Liz Truss’s tantrum, how quickly bond markets can become alienated. She will have to address a perceived shortfall in the public finances and the need to find seed funding for Great British Energy, a National Wealth Fund and other grandiose projects.
Ideas to crush wealth, through capital gains taxes, removing further tax relief on pensions and ending “carried interest” for private capital will put savings, investments and the City at risk .
Among the possible targets of the change could be the Bank of England, where Reeves spent six years before moving on to the HBOS disaster.
The Bank has received only a peripheral mention in the campaign. It escaped censure for its terrible forecasting record and the prevalence of groupthink, which contributed to interest rates staying too low for too long. The Old Lady’s perceived independence protected him from frontal criticism during the campaign.
The Treasury faces two potential challenges. The first is a change in monetary operations. To varying degrees, commercial banks could be effectively taxed by suspending all or part of the windfall profits they receive from holding funds on Threadneedle Street at a bank rate of 5.25 per cent. A less favourable approach could benefit the Treasury by billions of pounds.
Reeves is in favor of several changes at the Bank. She wants a mandate on climate change to be reinstated, she would like to see a greater diversity of opinions on the Monetary Policy Committee and, as a female chancellor, she would welcome the idea of there being a first female governor. The arrival of Clare Lombardelli, chief economist of the OECD, as lieutenant governor could eventually provide a succession plan. Lombardelli, a former Treasury economist who discredited the UK’s performance during her time in Paris, could be considered ideal.
Labour’s other priority will be to actively embrace Conservative plans to unlock money from UK pension funds to boost investment in riskier assets and infrastructure.
Jeremy Hunt has prepared the ground by getting defined contribution scheme managers to commit to investing up to £50bn in new projects. There may also be an opportunity to divert some of the £1.2tn of cash from modern defined benefit schemes into equity investments, start-ups and other opportunities. That could prove decisive, under the right conditions, in propping up the London stock market.
Hunt has already done much of the hard work in this regard. It should be part of a future Labour government’s growth agenda. But it would be easy for the next Chancellor to be sidetracked by unfinished business at Port Talbot and British Steel, Thames Water, Royal Mail and the imposition of dozens of new quangos.
Neglecting or tying the hands of the City and free market capitalism would be a world-class mistake.