Despite massive investment plans for hospitals, schools and laboratories, UK leaders needs to court entrepreneurs and improve trading relationships with EU countries.
Critics of UK chancellor Rachel Reeves have accused her of a “trick or treat” Halloween Budget, where the electorate have been tricked into £40bn ($52bn) worth of tax rises, in exchange for some investment into the NHS, schools and crumbling northern infrastructure.
Commentators have been queuing up to describe an expected “exodus” of wealthy families from this small island, following erosion of a previously benign tax regime for foreign ‘non-domiciled’ entrepreneurs.
The “starting gun” for massive migration of wealth, talent and investment from the UK has been officially fired by the chancellor, according to Nigel Green, CEO of the deVere financial advisory group, with offices in Europe, Africa and Asia, advising clients to take immediate action, leveraging “tax-efficient” structures, rebalancing portfolios, and planning inheritance early to help mitigate impact of the changes. This includes considering countries such as Spain, Italy, Switzerland, Singapore and Dubai, as “attractive alternatives” to “the UK’s intensifying tax landscape”.
But the reality is the chancellor has inherited an economic nightmare. Wealthy families have been leaving in droves during the tenure of the previous Conservative administration for two reasons, even more important than tax.
Firstly, they saw scant evidence of investment in airports, hospitals and Victorian rail and water systems. Secondly, they lived through pain of their businesses hamstrung by Brexit, amid political instability, lack of vision and any real commitment to the British project.
The authorities “still have this flawed mindset, of ‘we have done the Brexit, but it’s such a beautiful country that everyone will trade with us, whatever happens’”, says Betrand Coste, an investment manager and scion of the Schlumberger oil family, who has just packed up the contents of his London flat and plans to divide his time between Paris and Luxembourg.
This view shared by migrating entrepreneurial clans – who have already found homes in Luxembourg, Dubai or Portugal – shows the magnitude of the challenge which faced Ms Reeves. Not only did she need to balance waywardly-run books, but she had to redefine what her country stands for internationally, in order to boost international investment into a moribund UK PLC.
“Repairing a broken economy always involves painful trade-offs that inevitably create winners and losers,” says Amin Rajan, CEO of the CREATE consultancy.
The losers from the most recent fiscal shake-up are undoubtedly wealthy families. While some might consider decamping to friendlier tax regimes, Mr Rajan believes the majority will “grin and bear it”, in the belief they will benefit from the reviving economy proscribed by Ms Reeves.
Her speech was telling not just by measures, but in language used. Key themes included planning and building, innovation and medical R&D. She proposed electrification of neglected rail services, clean energy job creation projects in depressed areas and tax breaks for film and TV ventures.
This is the modern world
Most of all, Ms Reeves talked about creating a “modern industrial strategy” and repairing the “fabric of our nation” in order to help revive a faltering, distressed economy, to an investible asset once more.
Free market ideologues call this a return to the discredited socialist principles espoused by Labour governments of the 1960s and 1970s. But in truth, no successful global economy still relies on the private sector alone for innovation and job creation. Covid-19 sparked a major sea-change, since when governments have become more interventionist.
The ground-breaking US Inflation Reduction Act has subsidised America’s green transition to the tune of nearly $370bn, while China is pumping billions into its high tech sector, leading to the domination of electric vehicle manufacturing. Closer to home, the EU’s Green New Deal has proffered €250bn ($270bn) worth of ecological incentives.
Contemporary ubiquitous technology in our mobile phones was not financed purely by digital tycoons, as Mr Rajan reminds us. “It is worth remembering that today’s highly popular iPhone benefited hugely from bringing together disparate innovations that were originally funded by governments in different contexts.”
Decades of underinvestment
We all have different ideas and interests regarding inheritance and capital gains tax thresholds, and treatment of the wealthiest in society, whether temporary guests or semi-permanent investors. But our new government “have put forward a Budget for growth after decades of underinvestment and austerity”, argues Christopher Rossbach, chief investment officer of the J. Stern & Co. private investment firm.
Economic growth, innovation and job creation all require a functioning, stable political, economic and social environment. While Mr Rossbach believes there is no need for a definitive industrial strategy, he does feel there are challenges to be addressed, beyond investment in infrastructure, health services and job training.
Most importantly of all, the ailing UK economy has to address the graphic, ghoulish wounds inflicted by Brexit. “There is a need for open and frictionless exchange of people, goods and services with the many large economies the UK trades with,” says Mr Rossbach. This is not just vital for economic success, but for cooperation in education and defence. Moreover, London must play a key role in “confronting misinformation and instrumentalisation of economic issues for political reasons”.
Post-imperial malaise
Latest economic and political problems are not the manifestation of any crisis, but symptoms of an ailing patient, afflicted with long-term underperformance issues, according to Invesco’s leading global macro strategist, Arnab Das. He dates the diagnosis back to 1962, when US Secretary of State Dean Acheson asserted, in the aftermath of two world wars, that “Great Britain has lost an empire and has not yet found a role”.
What followed, says Mr Das, was “the malaise of the post-imperial, corporatist era”. This took root in the 1970s, when successive currency crises left the UK lagging the rest of Europe and the US, culminating in an IMF rescue programme and industrial strife during a “winter of discontent”, when a “military coup might have been on the cards, in the cradle of parliamentary democracy”.
It took the 1980s Thatcherite revolution to catapult the UK onto the international economic stage, as a bridgehead, coordinating trade between the US, Asia and the EU single market, and highlighting British brands globally. While traditional mining and manufacturing industries in the UK’s northern regions were systematically destroyed by the government, the City of London emerged as the world’s leading financial centre following Mrs Thatcher’s Big Bang deregulation.
A corresponding geopolitical re-orientation took place under stewardship of Tony Blair, from 1997 onwards, with London operating as an effective intermediary between the US on one hand, and Europe and the ‘Global South’ on the other.
All of this was undone by the global financial crisis in 2008, with the disenfranchised or “left behind” community voting for Brexit in 2016, further scarred by Covid several years later.
Our latest round of soul-searching cannot be a purely philosophical debate. It must create political stability, recognise the role of family businesses and entrepreneurs in driving innovation and spur new policy measures for trading with the EU. According to Mr Das, despite Labour’s “loveless landslide”, with its massive 174-seat parliamentary majority, recognition of entrepreneurial families and definition of a profitable relationship with the EU are yet to come.
“For most firms, investors and employees that would mean lower tax, lower regulation and greater ease of doing business and finance in other ways, to offset the impact of greater regulation of UK-EU trading relations,” he suggests. The signals from both the UK and EU do not suggest any major improvement, since both sides have internal political reasons to avoid the single market or customs union.
These historical spectres still loom over the UK’s economy and society. After a bold Halloween attempt by his neighbour Ms Reeves to banish the ghosts, it is now for prime minister Keir Starmer to cast his own spell. He must make sure Number 10 Downing Street does not remain a forever haunted house.
Yuri Bender is editor-in-chief of PWM
