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Labour’s economic project will drive Britons abroad

No friends of the City. Credit: Getty

July 11, 2024 - 7:00am

The financial press is hyping up the new Labour government as the politicians who will finally rejuvenate the British banking industry. The Financial Times recently ran an article that lays out the City of London’s “wish list” for Keir Starmer’s ministry. As the Conservative Party fell in the polls many big hitters in the banking sector were wooed by Labour, with the party going so far as to give Bloomberg an exclusive look at its manifesto after the company donated £150,000 — an action that was denounced as “cash for access” by some in the party’s base. This week’s announcement of a £7.3-billion national wealth fund has only increased the excitement.

Yet there seems to be a wide chasm between the expectations that are being generated in the City by an enthusiastic press and the reality of how Labour will govern. Much of the hope that Starmer and his Chancellor, Rachel Reeves, will improve the business environment for British finance revolves around regulation, with Labour pledging to form a “regulation innovation office”. But the reality is that significant moves toward deregulation have already been undertaken by the previous chancellor under the Edinburgh Reforms and the Mansion House Reforms.

Labour is keen, however, to further explore alternative investments for British pension funds, and there are calls for the new government to encourage funds to plough more money into undervalued British equities. The problem with this is that British equities are valued that way for a reason: markets do not have very high hopes for the UK economy. There are serious questions about encouraging British pension-holders to boost domestic equity valuations if the prospects for the underlying companies are dubious.

There are also calls to allow pension funds to invest in unlisted assets. In practice, this would push British pension fund money into private equity and private credit vehicles, the idea being that returns for pension funds would be boosted. This would be a very risky strategy because markets and regulators are becoming increasingly aware that unlisted assets — sometimes referred to as “shadow banks” — can carry risks which are hard to track. If a Labour government shepherded pension money into a sector that then blew up, it would destroy the credibility of the party.

The reality is that most in the financial services industry will pay substantially higher taxes under Labour, and this will make living and domiciling in Britain far less attractive. Labour’s fiscal plan is based on raising £8.5 billion a year by the end of this parliament. Most of this tax will be raised by changing the rules on non-dom status, something the previous government was already working on. But even these changes leave a fiscal hole of over £3 billion that needs to be filled.

To plug the gap, Labour is introducing changes to the tax system that will disproportionately hit those working in financial services. First, there is the closing of the “carried interest loophole”, which allows private equity and hedge fund managers to tax a large portion of the profit they make as capital gains rather than income. Labour argues that this is unfair. Whether this is true or not, closing the carried interest loophole will make it far less attractive to run a fund in Britain: we may well see a good portion of fund managers in London’s Green Park area pack up and leave.

Labour also wants to end the VAT exemption for private schools, meaning that VAT would be applied to school fees. Given how many people who work in the financial sector send their children to private schools, this equates to a significant increase in their overall tax burden. While Labour has not committed to raising capital gains tax, the party has not ruled it out either. Since financial assets are taxed in line with capital gains, this is yet another potential tax on the British financial sector. If there is a recession and the budget deficit increases further, expect Labour to try to maintain its pledge of “not raising taxes on working people” by raising higher-end income taxes.

Overall, the hype about how this government will rejuvenate the British financial sector is just that: hype. If we look under the hood it soon becomes obvious that Labour is going to provide a high-taxation government and will be focusing those higher taxes on the wealthy and those who work in financial services. Anyone in the City who has bought into the headlines is set to be severely disappointed over the next few years.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Richard Calhoun
Richard Calhoun
3 months ago

Seems there is much speculation in this article?
Perhaps best to wait and see what happens first?

Martin M
Martin M
3 months ago

If one is going to get out, going earlier rather than later might be sensible.

Santiago Excilio
Santiago Excilio
3 months ago

That’s rather like pitching your tent on a faithful geyser and then waiting to see whether you survive the night.

j watson
j watson
3 months ago

The standard retort to any attempt to rebalance the tax system more fairly – ‘we’ll leave’. Well whilst one has the reflex ‘well just go then if that’s how much you value being British’ one has to temper that. Fact is though assets don’t move quite as easily as people and Govts can takes steps to further assure that.
Another example – if Labour hikes Council tax on the most expensive properties the Russian or Middle eastern oligarch isn’t about to sell the penthouse or country manor and go elsewhere. It’ll be pocket change for the v rich.
The VAT exemption withdrawal in private schools may have a marginal impact on some who then can’t absorb the pass-through cost but it’s not going to impact the most prestigious. They can easily absorb it. They just don’t want to. Perpetuating inherited, unearned inequality is not in the economic interest of the country.
As we know the v rich have got much richer at a time when a cost of living crisis extends to an ever greater proportion of the population. The Author’s general contention underlines why – the v Rich v clever in how they lobby and they recruit alot of useful idiots to help them in the process.

Hugh Bryant
Hugh Bryant
3 months ago
Reply to  j watson

If this government that wanted to rebalance the tax system fairly it would tax the freeloaders and rent seeking grifters not the wealth creators. Unfortunately that would not go down too well with the property rich but unproductive home counties boomers who elected it.

Quite apart from that the problem with all the solutions you propose is that they won’t raise any money. It’s not the vanishingly few people at the top who get wealthy and do nothing who are the problem in Britain, but the vast army in the middle who get wealthy doing nothing useful.

j watson
j watson
3 months ago
Reply to  Hugh Bryant

I think there is something v British about how folks with a bit spare tend to invest in property and rental income rather than ‘business’. And I would concur we need a rebalance here. That can be encouraged via the Tax system. It’s the old ‘safe as houses’ mantra. And where you and I would find common ground I think is this has also become a marked inter-generational form of extending and perpetuating inequality. So perhaps a higher CGT on rental properties, but we need some rent controls too of the cost just gets passed through. If that then pushed more houses onto the market and reduced prices that’s a good thing as well.
But where we differ is I’d hit the v rich much harder on unearned income, and I don’t buy they’d all move elsewhere. The assets on which they have that income can’t as easily move. And if the Foreign Exchange dealer who pays income tax wants to move to Singapore because his bonus going to be more heavily taxed then ‘off you pop’. Someone else will do the job as our Banks here will still need the role.

Hugh Bryant
Hugh Bryant
3 months ago
Reply to  j watson

I think there is something v British about how folks with a bit spare tend to invest in property and rental income rather than ‘business’. 
Give me strength!
‘Folks with a bit spare’ didn’t invest this money, the GOVERNMENT did. In 2004, Gordon Brown quite deliberately – and for cynical political reasons -. removed housing costs from the Bank of England’s interest rate remit. His successors didn’t remedy this. The result is we’ve had artificially low interest rates for twenty years. That’s why you’ve got richer every year while rent payers and small business people got poorer. It’s not because you ‘invested’ anything, FFS.
The property heist represents the largest upward transfer of wealth in this country’s history – or at least since the time of the enclosures. Along with mass immigration it’s the root cause of all our current problems. And calling me a racist isn’t going to change that. It’s a fact.

Jeremy Bray
Jeremy Bray
3 months ago
Reply to  j watson

“But where we differ is I’d hit the v rich much harder on unearned income”.
Income from investment is not unearned if that word is used in the pejorative sense of undeserved.

If someone decides to spend their taxed income not on consumption but by investing it in some enterprise in the hope of receiving a return from that investment that should not be regarded as unearned as it is the product both of their labour and decision making in choosing to risk their money in furtherance of some enterprise.

Capitalism (indeed any enterprise) requires the potential of reward to those that save their income to invest in the hope of such reward. Income derived from investments is the result of not spending and the intellectual effort of choosing profitable investments and is assuredly not unearned.

Of course Socialist governments can tax individuals to invest through state organs but history proves that such investments are invariably less successful than the accumulation of individual investment decisions that reward those who are good at making such decisions. The element of risk and potential loss in any investment is always overlooked by those who regard investment income end capital gains as unearned.

Hugh Bryant
Hugh Bryant
3 months ago
Reply to  Jeremy Bray

The element of risk and potential loss in any investment is always overlooked by those who regard investment income end capital gains as unearned.
It never occurred to Karl Marx, who was in the habit of leaving the shopping entirely to poor Charlotte, that an investment might not produce any return or might even be entirely lost. Consequently he utterly failed to understand that profit, far from being a surplus stolen from the worker by the evil top-hatted capitalist, is actual the necessary price of risk. In the twentieth century 100 million people died to prove his error – but, amazingly, there are still people who base their entire philosophy on it.

Colin Haller
Colin Haller
3 months ago
Reply to  Hugh Bryant

Ah yes, the “risk” dodge. I suppose it has escaped your notice how the current crop of capitalists is constantly bleating on about “de-risking?” Funny that I don’t hear any of them requesting any concurrent reduction in their profits, eh?

j watson
j watson
3 months ago
Reply to  Jeremy Bray

Income from investments is reasonable. Paying a lower rate of tax on that form of income than on work/employment income is where it’s wrong and advantages those with assets and asset driven income. Rebalance needed.

Jeremy Bray
Jeremy Bray
3 months ago
Reply to  j watson

Why do you think the rich are paying a lower rate of tax on profits generated by investment in business? Profits within a company are taxed at 25% and then what is paid out as dividends is taxed a second time at 33.75% for the those rich enough to earn over £52,270 and 39.35% for those in the next tax bracket. So the accumulated tax on the profits generated exceed the tax paid by those on work/employment income at those levels. Of course if you disregard the 25% company tax then it might appear dividends are favoured but the fact is HMRC takes two bites of company generated profits so those with assets (ie money not spent on personal consumption but saved) are not as you put it advantaged.

j watson
j watson
3 months ago
Reply to  Jeremy Bray

CGT is paid at a lower rate as I’m sure you know. 20% and not 40%.
And as you’ve just set out the owner of assets will also pay a lower rate than current income tax on dividends. (You are assuming the company tax is paid by them. It’s not. They are not the company. I know the point you are making but it’s erroneous. Like claiming shouldn’t have to pay tax on my rented property because my tenant is paying Council tax)
That said there could be better tax incentives to reinvest dividends and dividend payments in some areas look distinctly problematic – e.g Thames Water and £77b in payouts.
Inheritance tax separate but should be hiked. It’s totally unearned and locks in inequality – which of course is why it’s resisted.

Jeremy Bray
Jeremy Bray
3 months ago
Reply to  j watson

CGT might fairly be adjusted upwards if indexation was reintroduced to ensure tax was not paid on illusory profits that are merely the result of the currency being depreciated. The purpose of a lower CGT is to avoid the complexity of tax calculations that take currency depreciation into account.

While the heir may not have earned what he/she inherits the motivation for many (probably most) to pursue some enterprise or risky investment is not solely for self-centred gain but to benefit one’s family. Excessive IHT merely reduces incentives for enterprise or diverts effort into avoidance through increasingly elaborate financial schemes. You seem to view the world through an atomised lens that takes no account of family ties. Those economies that recognise and foster such ties tend to prosper.

Colin Haller
Colin Haller
3 months ago
Reply to  Jeremy Bray

“Unearned income” is income from economic rents, a distinction from the “earned income” from work as understood by the Classical economists. Of course, this distinction disappeared during the “marginal revolution” in economics (during which time it ceased to be its original “political economy”) of the late 19th Century and has subsequently been almost permanently buried by the abandonment of any teaching of the history of economic thought from Economics departments over the past 50 years. The only people who remember such things are typically historians or cranks such as myself …

Santiago Excilio
Santiago Excilio
3 months ago
Reply to  j watson

Why would anyone bother invest in ‘business’? Have you ever started one? I have started and sold several and I can tell you straight up that I wouldn’t bother do another in the UK. There is no reward for entrepreneurship or risk taking any more. The government simply regard businesses as vehicles for implementing and paying for their ever expanding list of social & employment rights, regulations and legislation. Make a profit? Don’t worry we’ll take that from you? Sensible capital allowances? Nah. Entrepreneurship CGT relief when you come to sell after toiling away for years. Nah, we’ll cut that to nothing and probably get rid of it entirely. DEI and gender pay-gap reports? Oooo yes, loads of that because that really adds value along with a tidal wave of red tape and compliance crap.

If you really think that those who can move won’t you’re deluding yourself, they are leaving daily, and one fine day you’ll wake up and discover that you’re going to have to pay your own way.

Dearie me, perish the thought.

Hugh Bryant
Hugh Bryant
3 months ago

You are obviously unaware of Modern Monetary Theory. Why do we need businesses at all when a government can simply print the money we need and give it to us to buy the stuff we need?

Colin Haller
Colin Haller
3 months ago
Reply to  Hugh Bryant

You are also very obviously unaware of Modern Monetary Theory, because it says precisely none of that. Off with you to read Mosler’s white paper, or just keep your ignorance to yourself …
https://docs.google.com/document/d/1gvDcMU_ko1h5TeVjQL8UMJW9gmKY1x0zcqKIRTZQDAQ/edit

Rocky Martiano
Rocky Martiano
3 months ago
Reply to  Colin Haller

What a rude, arrogant and offensive reply.
Perhaps you should explain how the current US national debt of $34 trillion, rising by $4 trillion p.a. which is essentially financed by MMT, is not going to cause a catastrophic financial crisis as the cost of servicing that debt takes an ever-increasing proportion of the federal budget.

Colin Haller
Colin Haller
3 months ago
Reply to  Rocky Martiano

Nothing is “financed by MMT” since it’s merely a description of fiat monetary operations which have been in effect since the Nixon Shock and the abandonment of Bretton Woods.
What “catastrophic financial crisis?” Oh, do you mean like the one that Japan must have gone through for running such massive deficits and debt up over the past 30 years? Oh, right — there hasn’t been one.
Sorry for yet more rude, arrogant and offensive facts …

RA Znayder
RA Znayder
3 months ago
Reply to  Hugh Bryant

In the end, wealth can only come from actual production, true innovation and commodities like raw materials. Since the 80s much of this has to come from abroad. What many Western countries are doing is money manipulation. This can trick people into believing that wealth is being created but the opposite is true. Especially because it seems that the rent seeking class now owe much of their wealth to the stimulus programs like quantitative easing. This has facilitated something of a reverse Robin Hood situation.

Kevin Dee
Kevin Dee
3 months ago
Reply to  j watson

There are trade offs to any situation. If you want cheaper housing in London maybe you need to offload a few finance bros. You want your smartest talent doing something actually productive rather than gambling someone else’s money in the financial market then maybe you should disincentivise the finance industry. Current system is unfair and not really working so why not try this.

j watson
j watson
3 months ago
Reply to  Kevin Dee

I think you are raising the point that how UK capitalism rewards certain jobs with excessive salaries just doesn’t tally with what a fair and efficient economy needs. If so I totally agree. Effective investment banking adding real value to the UK economy I think should be highly rewarded. Casino type activity with someone’s else’s money much less so, esp when it’s the rest of us that bears the risk if they make a complete mess of it as in 2007-8.
I’d add that some of the extortionate Boardroom salaries need to be hit harder where the postholder is not the entrepreneur who established the business and generated the jobs and wealth for others. This is a form of ‘managerialism’ that can plague us. (The Public sector can have a bit of this too, but the salaries are massively lower and folks need to remember that). One can’t but be angry to hear about the bonuses for Thames Water Execs being awarded right now. The fact that can happen shows something v wrong but as it’s a monopoly Govt can do something about it and I’m sure will given time.

Utter
Utter
3 months ago
Reply to  j watson

Amen to that. There is a unexplained double standard – likely harmful, or indulgent goods, such as tobacco and perfume, are taxed at higher rates (& vice versa) – and few doubt the wisdom of this. Why not apply the priniciple to sources of income?

As an aside, reading this article made me wish for a ‘journalist reliability index’ – whereby a journo’s bold predictions are noted, and later, marked for accuracy. I think they’d tend to score fairly low – humans lacking the gift of prophecy, and the World being rather complex etc – but it would at least act as a useful reminder of general fallibility, as well as shining a light on the more spectacular successes/failures. .

Ash Sangamneheri
Ash Sangamneheri
3 months ago
Reply to  Kevin Dee

Why desincetivise things, that to me seems regressive, why not match the incentives? It’s like the tax on private schools, why not make it easier for anyone to go to private schools, instead of penalizing for doing so. That IMO would be far more effective.

Billy Bob
Billy Bob
3 months ago

The academy system is in effect sending children to private schools via the taxpayer, and results have been decidedly mixed. The average scores haven’t improved, but you now have much wider discrepancy between the good and bad schools than you did under the old more centralised system

Hugh Bryant
Hugh Bryant
3 months ago

I’ve never been able to understand why the voucher system cannot be adopted for education

Dr E C
Dr E C
3 months ago
Reply to  j watson

You lost me at VAT on private school fees. Think about how many private schools there in the uk (I don’t mean Eton & Rugby, I mean middling Preps in every town); then think about how many super rich elites there are – here or anywhere. The maths doesn’t check out.
Britain’s private schools are mostly frequented by seriously unwealthy middle class kids, including lots of kids of immigrants whose families are putting everything they have, financially, into their future because they believe in the importance of a good education rather more than the average Brit. Those parents are already paying twice: extortionate school fees + taxes to pay for free schools for everyone else. VAT is going to push many, many of those kids out of private schools into the already overcrowded, failing state school system. It’s a lose- lose. It doesn’t even make moral sense since _everyone’s_ education will get worse.

Martin M
Martin M
3 months ago

Labour being a high taxation government? No! Surely not!

Mr. Swemb
Mr. Swemb
3 months ago
Reply to  Martin M

Bears woods, Popes Catholics, Labour taxes

Norfolk Sceptic
Norfolk Sceptic
3 months ago

“If a Labour government shepherded pension money into a sector that then blew up, it would destroy the credibility of the party.”

I thought they were doing that in the NET Zero sector, with taxpayers money, already.

And those batteries do, literally, blowup, but I’m still waiting for a politically significant sign of credibility destruction.

Susan Grabston
Susan Grabston
3 months ago

It already has. Good morning from IOM.

Santiago Excilio
Santiago Excilio
3 months ago
Reply to  Susan Grabston

Well done you.

RA Znayder
RA Znayder
3 months ago

Western countries are under siege of the financial industry.
From their banks, hedge- and equity funds these people pretend to be financial wizards but 2008 should have shown us that they’re really not. They have been on the central bank lifeline since then because deregulated finance was, and seemingly still is, full of malpractices. In the end your pension is simply managed by professional gamblers who have an interest in keeping your income low. Do you think that actually benefits you? Put some money in a mixed portfolio or some ETF, you get similar returns. Moreover, on closer inspection it seems to me that behemoths like equity funds basically run elaborate Ponzi’s and pump and dump schemes. Do you think that benefits you? Economist Lockwood and colleagues published an article article which argued that many of those working in the financial industry fundamentally do not add value but instead mostly extract.
Not only that. As punishment for screwing up in 2008 this central bank lifeline provided them with an unimaginable amount of free money. In 2020 it happened again. The problem is they use this money to buy your assets. The ultra wealthy increasingly own your work, your debt and your house that your children can no longer buy.
So forget capital gain tax. Tax their recently accumulated assets, in other words, take them back. Even if they do go, make sure to tax the assets that are within the borders in your so-called sovereign state! Take essential state assets back and bring back production from overseas. A country cannot survive forever with a huge trade deficit. And then, when you have an actual economy, perhaps you do no longer need the financial wizards at all.

j watson
j watson
3 months ago
Reply to  RA Znayder

Yep, on it there RAZ

Michael Cazaly
Michael Cazaly
3 months ago
Reply to  RA Znayder

Yep…confiscation, without compensation, that’ll work…umpteen cases at the ECHR…

RA Znayder
RA Znayder
3 months ago
Reply to  Michael Cazaly

I mostly suggest taxing the assets accumulated through crony practices, e.g. either directly or indirectly using public QE money. If anything that should rectify the actual confiscation.

Colin Haller
Colin Haller
3 months ago
Reply to  RA Znayder

It would appear that someone is familiar with their Gary Stevenson. Well done, you!

Victor James
Victor James
3 months ago

Nothing can be done until Britain gains independence from the super parasite that is the United States.
It’s one thing to say Britain is a vassal state of the United States, it’s another to document the scale of the horror. “Britain is in an abusive relationship” according to the author of The Vassal State: How America runs Britain
Once you see it you can’t unseen it. The SDP actually are the only political party talking about this abusive relationship. Because Labour are not, nothing can change.

Here’s How America Really Runs Britain | Aaron Bastani …www.youtube.com › watch

Santiago Excilio
Santiago Excilio
3 months ago

It has already driven plenty of people away, and I speak as one of them. Reading the tea leaves two years ago we decided that labour was bound to win this last election and then bound to do what they always do which is to steal any wealth they can. It took a year to plan our exit and we’ve now been gone 6 months. Currently selling down UK assets and won’t be returning. Moreover I am not alone, I know multiple people who either have left or are planning to, and who can blame them?

UnHerd Reader
UnHerd Reader
3 months ago

“unlisted assets — sometimes referred to as ‘shadow banks'”
That’s somewhat over-simplified. ‘Shadow banks’ is not a synonym for ‘unlisted assets’.

Rocky Martiano
Rocky Martiano
3 months ago
Reply to  UnHerd Reader

Indeed. I see no correlation between the two terms whatsoever. Is Mr Pilkington one of those ‘one-armed economists’?

Ash Sangamneheri
Ash Sangamneheri
3 months ago

Labour seems to paint the people who send their children to private schools are some sort of free loaders, who need to pay for the privilege. But these are the very people who are already paying 40%-45% income tax, have health insurance, pension, etc which means they are already contributing large sums to the state in taxes and are least burdensome to the state. So why are they being hounded and penalized for the inefficiencies of the state? Why not instead give people a choice (we are a democracy) to take out private healthcare care if they so wish, or send their kids to go to private schools, etc and not be forced to use substandard services from the state? And instead of penalizing people for doing so, let’s make these tax deductible so these options are available to everyone. Let the people decide if they think the state can provide better services or the private sector. I don’t think the state has a god given right to a monopoly, not in a democracy.

Colin Haller
Colin Haller
3 months ago

Er, the state as such exists BECAUSE it has a monopoly over the legitimate use of force within its borders, regardless of its organizational principles (democracy or otherwise). To imagine that it cannot also therefore arrogate to itself whatever other monopolies it so desires is merely wishful thinking. I don’t mean to say that monopolizing everything would be effective — the trick is getting the right mix of public and private since all economies are mixed economies.

Rocky Martiano
Rocky Martiano
3 months ago

But, but…..they’re rich, so it’s all OK.

John Howes
John Howes
3 months ago

Labour will ‘create’ a Green Energy industry, why? to employ all the lost jobs from Milicump’s cancellation of drilling licenses. We don’t even get a mention globally.
https://www.statista.com/statistics/267233/renewable-energy-capacity-worldwide-by-country/