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Can Rachel Reeves save the City?
Chancellor Rachel Reeves is mulling a tax cut, which would be welcome – but it’s nowhere near enough, says Matthew Lynn
Over the last couple of weeks, there have been some faint signs that the initial public offering (IPO) market in London is finally coming back to life. The digital bank Shawbrook said on Monday it would list its shares in the UK at a value of around £2 billion. Last week, the food and drinks company Princess Group, which makes Branston’s pickle as well as tinned tuna, said it was considering a listing in London, with a valuation of around £1.5 billion. The Beauty Tech Group made its debut on the market last Friday. And yet, as welcome as that flurry of activity is, it should not distract anyone from the wider picture.
The London market remains in a dire state. A report last week found that it has slipped to 22nd place globally for new equity issues, behind even Mexico and Qatar. The amount of capital raised through IPOs has fallen to its lowest level in 35 years, while the total number of companies listed on the exchange has fallen from close to 2,500 a decade ago to only a little over 1,500 now. Plenty of companies have shifted their listing to the US, others have decided to accept a takeover, and many entrepreneurs building new companies have decided a quote in London is no longer worth either the expense or the hassle. It could get a lot worse. There are already ominous signs that drugs giant AstraZeneca may shift its listing to the US, and BP could easily be taken over by one of its rivals.
Chancellor Rachel Reeves may have realised that something needs to be done. According to leaks, in her Budget next month, alongside the blizzard of tax rises, we may get one modest tax cut. Stamp duty could be scrapped for newly listed firms, or they could be exempted from the levy for two or three years. Investors would be allowed to buy shares without giving 0.5% of their value to the Treasury. It would be great if Reeves had finally recognised that cutting taxes can boost growth and raising them often crushes it. Perhaps she might start applying the same logic elsewhere.
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But Reeves needs to be a lot bolder. Stamp duty should be scrapped completely. A levy every time a share is bought or sold is a huge competitive disadvantage compared with other markets where people can trade equities freely without being forced to pay anything to the government. Sure, it raises slightly over £3 billion, and the Treasury is strapped for cash. But in the medium term, far more tax revenue will be lost if the City turns into an irrelevance on the global equity markets. The levy is a relic of the days when the London market was so important that it could afford to be taxed when others were not. Those days are long gone.
The mess of governance codes that have built up over the last 20 years need to be scrapped, too. Quoted companies have to comply with a whole list of regulation – from diversity on the board, to controls on executive pay, to environmental and social targets – that simply don’t exist for private companies, or which are far more lightly imposed on rival markets. These rules might be well intentioned, but they impose big costs. They also take up a huge amount of managements’ time for no discernible benefit. London could lead the world in switching back to a simpler system.
Finally, why not offer entrepreneurs a tax break for listing in London?
There could be an exemption from capital gains tax for any founder who decides to float their business in the City. That would be a huge incentive over selling it to a foreign buyer or private equity firm. Who knows, it might even persuade a few of them to stay in Britain instead of moving to Dubai or the US.
The London stock market is facing extinction. The City has plenty of other businesses, from insurance to fund management to issuing debt. But the blunt truth is that there is not a major financial centre anywhere in the world that does not also have a thriving equity market at the centre of its operations. In London, that is disappearing. The LSE needs radical help – a tiny tweak to stamp duty won’t be nearly enough to save it.
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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
