The Financial Times is reporting today that multimillionaires in the UK are setting offshore investment accounts as a hedge against a Labour government run by John McDonnell and Jeremy Corbyn. They clearly think a Labour government is a risk. Should you get out too if you're working in the City of London?
You don’t have to be very old to remember a Labour government in the UK – there was one in 2010 - but what about a proper socialist one, as opposed to the Blairite variety? To remember that, you have to be pretty ancient.
This could soon change. The current odds are about even for a Corbyn-and-McDonnell-led Labour party to win the highest number of seats in the next election (whenever that is). The omens are not great: McDonnell famously cited his hobby as "overthrowing capitalism" and Corbyn has consistently denigrated 'casino' banks and said that finance will serve Labour under his administration.
That's the bad news. The good news is that political parties very often change their tune once in they are power and are buffeted by ‘events, dear boy, events’.
That said, the Labour 2017 manifesto gives some solid clues as to the likely flavour of things. In a word, it would be … interesting.
The biggest policy specifically involving the City itself is Labour’s plan to create a National Investment Bank “that will bring in private capital finance to deliver £250 billion of lending power [and] … will support a network of regional development banks that … will deliver the finance that our small businesses, co-operatives and innovative projects need.” It’s a familiar structure from some other European countries, most importantly Germany.
This is all touted as being in addition to what existing privately owned banks do, since – and this has been a consistent Labour accusation since the Great Financial Crisis – they are supposedly failing in their duty to lend for commerce as opposed to property.
To me, this implies one rather positive thing for City workers. The new bank would need to hire a whole heap of staff: loan officers, credit staff, line managers, IT professionals, the lot. Maybe that’s a good thing if you fancy a change from your job at Barclays (say) or a posting to a less expensive part of the country than London (Hull?).
Of course, it is possible, faced with the long and arduous task of setting up this banking structure from scratch, that Labour might look to cannibalise bits of the universal bank that the nation already actually owns: namely, RBS.
There's therefore a very strong chance that RBS – rather than being punted out to the private sector again – becomes the core of the new National Investment Bank. Labour strongly hint at this when they state that they’ll launch a consultation on “breaking up [RBS] to create new local public banks that are better matched to their customers’ needs.” Good luck with keeping your job if you are a senior RBS manager under that scenario. The new management team will be political appointees charged with “delivering Labour industrial strategy”, not the old guard.
None of this would be good news for British banks' shareholders. There is no way that the National Investment Bank’s activities would simply be complementary to what privately owned banks do right now – there would a massive temptation for it to provide loans and other services to companies that are already served by the big UK and foreign banks. More than that, the loans would be at a cheaper rate, since governments can borrow more easily than banks and the National Investment Bank won’t be focused on profits.
Thus existing banks would be competing with a new low cost producer. The overall effect would like the effect of Landesbanks in Germany: a heavy anchor on the private sector.
The other plans for the financial sector will probably be of only marginal impact, though. Labour has plans to “extend Stamp Duty Reserve Tax” and to “[put] in place a firm ring-fence between investment and retail banking”. The former – a sort of half-hearted Tobin tax on derivatives - would introduce extra bureaucracy and almost certainly not work to raise the sums counted on (about £5 billion) since the planned tax rates are too high relative to derivative bid/offer spreads. The latter – ring-fencing - is happening already anyway.
Needless to say, though, Labour's specific plans for the finance sector are just one part of the story. More important is the wider economic approach that Labour would take. They are pledged to borrow and tax in order to spend and invest.
The ‘borrow and spend’ part of it could have some minor positive results seen from the City’s vantage point. First off, it will inject extra volatility into the gilts market – usually a good thing for gilts desks. Also, the debate over whether extra borrowing is a bad or a good thing (“it’s burdening future generations to pay inflated public sector wages now” versus “it’s borrowing at rock-bottom rates to invest in infrastructure for the long term”) will no doubt feed through to bigger swings in Sterling. Happy days for FX folk! Labour also plans to renationalise the railways. Fees for investment bankers beckon!
But, for the City, there’s no real silver lining on the ‘tax’ piece. Corporation tax will certainly rise from its current 20%. The recently announced plan to allocate 10% of shares to workers is also taxation by other means. And, of course, personal taxation will rise for ‘the rich’ (i.e. anyone earning over £80k a year) – the majority of whom work in the Square Mile.
Worse still, it is likely that if a Labour government found it necessary to look for a bigger tax take in the future, the City – whether in the form of its firms or its employees - is the golden goose is they would be tempted to turn to first. Let’s face it, squeezing the City ‘til its pips squeaked’ (to use a notorious expression used by one of last chancellors in ‘real Labour’ government in the 1970s) would be fairly popular with Labour's supporters.
However, paradoxically, is the very juiciness of the goose that might be its best protection from excessive future pip squeezing. The financial services sector is the biggest single contributors to total UK taxation – 11% in 2017. Any UK government, Labour or Tory, is going to need that cash. With the City already unnerved by the uncertainty of Brexit and with other European capitals pouting seductively at London-based firms, could Chancellor McDonnell really risk an 11% hole in the public finances?
The bookies reckon we will have a coin toss’s chance of finding out.
Kevin Rodgers started his career as a trader in 1990 with Merrill Lynch in London before joining another American bank, Bankers Trust. From there he went on to work as a managing director of Deutsche Bank for 15 years, latterly as global head of foreign exchange. His book, “Why Aren’t They Shouting?: A Banker’s Tale of Change, Computers and Perpetual Crisis” was published by Penguin Random House in July 2016.