City bites its nails on election fallout
ABATTAlIOn of business leaders, from exM&S boss Stuart Rose to Carphone Warehouse founder Sir Charles dunstone, have lambasted Ed Miliband in the election run-up.
The more polite critics have accused labour’s leader of being anti-business, while the more strident have branded him a ‘card- carrying Marxist’ who will drag Britain back to the 1970s.
In a blow to Miliband, 103 company bosses last week signed a joint letter praising david Cameron and George Osborne for helping to create jobs and growth by cutting corporation tax – and warned that labour will threaten jobs and deter investment.
So what are they all so afraid of? And what, in particular, does this election mean for the City of london and its crucial financial services industry?
TORY-LED GOVERNMENT
THE referendum on EU membership promised by david Cameron by 2017 is one of the biggest concerns of business leaders. It is also labour’s trump card when trying to woo the business vote.
Earlier this week Miliband roped in former prime minister Tony Blair, who warned the referendum would cause economic ‘chaos’.
Certainly many are extremely nervous about the prospect of the UK leaving the European Union.
According to a recent study from think-tank Open Europe, the financial services and insurance sectors will be the hardest hit by a so-called Brexit.
This is hardly surprising, as 41pc of the financial services industry’s exports are destined for the EU.
The loss of a single market ‘passport’ would mean that UK-based banks and other financial services may be forced to set up subsidiaries to maintain their access to the single market, which would be expensive and time-consuming.
THERE is a risk that some foreign firms that moved to london as a gateway to Europe could relocate, according to Open Europe.
The UK would also lose the power to vote on crucial policies affecting the financial sector in Europe. The study points out that the UK could be in the invidious position of controlling 36pc of Europe’s wholesale finance markets but having no vote on many of the rules governing that market. This means that the rest of Europe could gang up on the UK and impose tougher regulations which could hamper our financial services sector.
But Brexit could come with benefits too, according to Open Europe. Once outside the EU, Britain would be able to reduce or tailor regulation to make the sector more competitive globally.
Whatever happens, a Tory-led government will create uncer- tainty over Britain’s future in the Europe – and financial markets, investments and pensions funds detest uncertainty.
LABOUR-LED GOVERNMENT
WHETHER labour win by taking a majority or by forming an alliance with other parties including the SnP, the City will have to cope with a raft of new legislation.
It is hard to see the SnP objecting to labour’s plan for a bonus tax on bankers, repeating the levy introduced by former labour chancellor Alistair darling during the financial crisis.
The tax, which is likely to play well with the public, will clearly not go down well in the City.
labour hopes to raise £1.5bn to £2bn in its first year in office by imposing a 50pc tax rate on bonuses and new fixed allowances introduced to dodge the EU bonus cap.
It has also reserved the right to repeat the tax if it does not raise as much as expected. The party also wants to reintroduce the 50p tax on earnings over £150,000.
The banks say higher taxes will make it harder to recruit the best staff, who may be more inclined to head to other financial centres.
George Osborne made himself unpopular with the banking industry in the Budget when he announced yet another hike in the bank levy, the ninth since it was introduced in 2011, in a bid to raise another £900m a year.
Critics, including legal & General boss nigel Wilson, say financial companies could move overseas if the levy continues to rise.
But while this is certainly a danger under the Tories, labour is even more likely to use banks as a cash cow, having pledged to hike the levy to subsidise childcare.
This will all look like peanuts if labour raises corporation tax.
Ed Miliband wants to reverse the latest cut from 21pc to 20pc, while promising to ensure Britain has the lowest corporation tax in the G7. This is deeply worrying for business. Given Canada has the highest corporation tax rate of 26pc, labour could keep its promise while reversing the bulk of the cuts the Coalition made over five years. Even a 1pc rise in corporation tax adds roughly £1.5bn to businesses’ bills.
Chris Cummings, chief executive of lobby group TheCityUK, said: ‘Business needs a competitive environment.
‘Higher taxes will reduce foreign investment. If tax is higher in one country than another, the UK will look less attractive.’
And this week Miliband threw another grenade at the elite, with plans to tighten up the non-domicile rule which allows wealthy UK residents to limit tax paid on earnings outside of the UK.
MIlIBAnd claimed this would raise hundreds of millions of pounds in tax, despite shadow chancellor Ed Balls saying in January it would cost Britain money.
The influential Institute of directors agrees, describing the move as ‘ shrewd politics but unconvincing economics’.
It said the UK’s tax regime had attracted some of the most successful businesses and entrepreneurs in the world. The business group warned there is a ‘serious risk that large numbers of the international financial community, who have headquartered themselves in london at least in part because of our tax regime, will now exit the country’.
Britain’s lenders are also very nervous about labour’s pledge to break up the biggest banks, imposing a cap on their market share. It has promised to wait for the results of a Competition and Markets Authority probe which is looking at whether the industry is working well for customers.
While there is a long list of reasons why the City is twitchy about the prospect of a labour government, there is a more general unease among the business community that Miliband and his party are anti- business and anti-wealth.
david Buik of stockbroker Panmure Gordon said: ‘My main concern is an emotional one. Ed Miliband’s distrust and contempt for big business is worrying.
‘We are clearly not going to have a repetition of a Blairite pragmatic government that knows it needs really successful businesses because they generate the taxes to sustain a public sector. I just don’t think Miliband gets it.’