Prime minister Keir Starmer must move bravely to keep wealthy families on track, with his massive majority constrained by limited fiscal ‘wiggle room’ and tricky EU relations.
After a 1997 election campaign defined by the D-Ream dancefloor anthem ‘Things can only get better’, prime minister Tony Blair celebrated a 179-seat majority and enjoyed early successes in courting the City of London, foreign leaders and an adoring British public craving change.
Twenty-seven years later, forming a new government after a similar electoral landslide, Labour PM Keir Starmer faces a steeper challenge: leading a country voting in hope rather than expectation.
Economists and political commentators agree he has little ‘wiggle room’ left fiscally. The desperate state of the post-Brexit balance sheet left by previous Downing Street tenants means tax rises are a racing certainty, if broken public services are to improve.
As well as rebuilding fragile public confidence after poor voter turnout of just 60 per cent and improving lives of citizens promised a ‘levelling up’ of society by the previous administration, Sir Keir has serious work to do in the City.
Thankfully, his aides followed the example of Mr Blair, courting the financial community pre-election, so that chancellor Rachel Reeves is seen by the investment community as a positive, pro-business figure.
Private bankers and family offices attending the annual flagship PWM Global Wealth Management Summit in 2023 were left nonplussed by the uninspiring performance of a Conservative City minister, making sweeping claims about the positive impact of Brexit on financial services, despite failing to provide evidence.
Not only must Labour now shed the embarrassing ‘uninvestable’ tag from the once great UK PLC, but they need to encourage return of innovation, introducing incentives for wealthy families to remain, rather than joining other entrepreneurial migrants, ready to desert Brexit Britain.
Just enough for the City
These days, most companies are reluctant to float in the UK, seen as politically unstable and technologically backward, preferring a New York listing. A definitive sign is needed “early doors” from the new administration that London is again competing with leading global financial centres.
“First and foremost, the Starmer government will need to signal the UK is open for business, that they have a plan to deliver on growth and that Labour will remain fiscally responsible,” says Sharmila Whelan, global macro strategist at Westbourne Research, Services, previously at Bank of America Merrill Lynch and oil giant BP. What’s more, she says, competitiveness must be improved by cutting red tape, bureaucracy and “using tax and other targeted industry specific incentives that make the UK an attractive place to invest”.
Political stability – sadly lacking in the leadership of a Conservative-led government that has fielded five prime ministers during the last eight turbulent years – and sensible and transparent policy-making will be key.
Europe’s largest asset manager, Amundi, which runs €2.1tn ($2.3tn), says Mr Starmer’s accession to prime minister takes the UK one “step closer to becoming a safe haven” for bond investors, now scoring well on inflation and fiscal dynamics, as well as political risk.
A merited re-rating would signal a major turnaround in ‘investability’, following “years of uncertainty”, beginning with Brexit in 2016 and extending through the briefest of tenures of Liz Truss as PM in 2022, marked by sharp increases in term premia and yields. This could persuade international investors to re-consider global strategic allocations, even if only for diversification purposes.
Fantasy island
But in order to persuade family offices – led by entrepreneurs keen to invest in their host nation – to remain in the UK, tax breaks are needed, in addition to assurances that capital gains tax (CGT) and inheritance taxes will not surge. Invesco’s wealth management expert Graham Hook believes raising CGT could prove too tempting for the new chancellor, bearing in mind the Conservatives garnered a record £16.9bn ($21.7bn) through this tax in the financial year 2022-2023.
For institutions, and prized tech companies in particular, concerned with ease of doing business and listing, it is market liquidity, regulatory clarity and alignment with other international financial centres – in particular the EU – that will prove particularly important.
This has not been a priority under the Conservative administration, proudly preaching regulatory divergence, craving a ‘Singapore-on-Thames’ offshore status. This fantasy created by hopeful Conservatives is insulting to the south-east Asian financial centre, created by visionary founding father Lee Kuan Yew, transforming a once-poor swampland into the world’s most successful financial and trading hub.
What Singapore always had – and London lacked in recent years – is a strategy for growth, which has attracted private banks, private equity firms and a plethora of family offices.
True, there have been some deep thinkers within the UK Conservative party. PWM has interviewed several of these visionary characters in recent years. Former chancellor Kenneth Clarke, former government minister Jo Johnson, younger brother of the ex-PM, and former commercial secretary to the Treasury Jim O’Neill, inventor of the Brics acronym for emerging markets, all played a significant part in previous governments. Yet their well-thought-out strategies were rejected by the party mainstream, obsessed with distancing itself from Europe, their major trading partner.
London calling
Now there is an opportunity to once more strengthen relationships with the EU, which will help improve market sentiment and revitalise a challenged financial services industry in particular. Speak to continental private banks and asset managers and you immediately realise that London remains high on their list of target markets. For Amundi, it is a major priority.
But improving these relations is no longer the simple task it would have been if Brexit negotiations had been taken more seriously by the flamboyant Boris Johnson and his team.
For continental Europe, the threatening rightward political trend in France, the Netherlands and Germany, coupled with the rejectionist pro-Russian stance of Hungary’s Viktor Orban – currently president of the EU council – is the major concern.
London has been downgraded to a mere sideshow, with little appetite for rolling up the sleeves for another round of negotiations around Brexit. The most Sir Keir can achieve is tinkering around the edges of the accords.
But the spirit of co-operation and personal relationships are key. These can certainly be strengthened. Rather than revisiting old agreements, the secret will be working on key issues of the future. This involves proactively cooperating on common interests: climate change, financial sector regulation, market oversight and data sharing.
And let’s not forget the most important of all – national security. Agreements around a coherent policy to help Ukraine secure victory against the Russian invasion and prevent Chinese industrial and technological dominance are arguably in the interests of all parties. This will also help the UK enter the vanguard of massive infrastructure rebuilding investment projects.
As Sir Keir gets his feet under the Cabinet table, political pundits will look out for a major signal of radical action to improve the UK’s international brand. For late 1990s New Labour, this was an imminent post-election announcement: granting ‘operational independence’ to the Bank of England, to take politics out of interest rate decisions.
There is much to study and much to achieve, but sadly, the patience of the electorate is already threadbare. Mr Blair was eventually undone by the Iraq war and his beloved D-Ream disassociated themselves with his party. If Labour are not careful, they will eventually be played out to another D-Ream classic: ‘Put the blame on me.’
Yuri Bender is editor in chief of PWM
