‘The mood change is palpable’: UK firms feel Labour lift despite looming tax raid, says Peel Hunt

The UK economy is “rebounding solidly” and the City of London is reaping the benefits of the Labour government’s ‘growth agenda’ despite fears of an looming round of swinging tax cuts, one of the Square Mile’s top investment banks has said.

In a note to investors yesterday, Peel Hunt said the “mood change” in the UK was “palpable” and Britain was positioned for a “protracted period of above-average growth”, higher business investment, improving consumer demand and lower interest rates.

“The new government not only brings political stability and clarity, but also has a firm growth agenda,” Peel Hunt’s head of research, Charles Hall, and chief economist, Kallum Pickering, wrote. 

“This is evident from the Pensions review and the FCA’s competitiveness review, which we see as the start of a comprehensive change in approach.”

Britain was now “one of the few western economies without a populist either in power or waiting in the wings”, they added.

However, the bank’s comments are at odds others in the City who have been rattled by Labour’s warnings of a gaping “black hole” in the public finances and the need for a period of “painful” tax hikes to fix the foundations of the economy.

Speaking last week at Downing Street, Prime Minister Keir Starmer appeared to roll the turf for a series of tax raids in the budget in October, saying those with the “broadest shoulders should bear the heavier burden”.

The Chancellor, Rachel Reeves, is widely expected to lift capital gains tax and inheritance tax at her first budget.

Asked whether such moves would hit the appeal of the UK as a place to do business, Hall told City A.M. the improvement in the UK economy is “well entrenched” and compared to international peers “we’re looking more stable and more sensible”.

It is unclear how far the government will lift the rate of capital gains tax. In a 2018 Labour pamphlet, Reeves mooted equalising the charge with income tax at 45 per cent but the government has faced backlash from the City and accusations it has U-turned on its election promises.

She has refused to be drawn on the exact details of the plans but said the government is “going to have to make difficult decisions in a range of areas”.

However, some City figures have warned that any move to hike capital gains tax in particular would dampen investment into the UK and hit its status as a welcoming environment for entrepreneurs.

“Creating an entrepreneurial environment helps grow the economy. Yes, they’ve got some tough things to do, but surely you don’t shoot the very thing that you’ve promoted and been elected on,” Alasdair Haynes, the boss of challenger stock exchange Aquis, told City A.M.

Lisa Gordon, chair of investment bank Cavendish, told City A.M. last week that the move would “hammer value creators”.

Steve Henney, director of business development at Aquis, added that anything that “drives investment into only the largest of enterprises would rob us not only of the start-ups of today, but also of the unicorns of tomorrow”.