The City learned one lesson from Kwasi Kwarteng’s short stint as chancellor: be careful what you wish for. Kwarteng was the chancellor who delivered much that was on business lobbyists’ policy shopping-lists. Sure, omissions stood out: the levy on banks’ balance sheets and the banking surcharge. But he reversed corporation and dividend tax rises, ended the top rate of income tax, and signalled the demise of the banker bonus cap. All of those — save the last — have since been sacrificed. And business is pleased about it.
On paper Rishi Sunak’s ascent to prime minister should be the start of a far less promising period for the City than the one Liz Truss and Kwarteng ushered in less than two months ago. After all, barely four weeks back Kwarteng elevated the industry to heights not seen since before the financial crisis. Now, rather than powering the UK’s growth revival as Kwarteng had envisioned, the sector may end up powering the Treasury’s receipts — should corporation tax rise without the banking surcharge being cut.
Kwarteng’s brief tenure could have been the start of a reset with British business. But in the time since his “mini” Budget, the corporate wishlist has shortened sharply. It now runs to more or less two items dictated by government debt investors: fiscal responsibility and economic stability.
With such diminished ambitions, business may get what it now wants most dearly. But like everyone else, the financial services sector faces some uncomfortable realities.
The big high street lenders are self-aware enough to understand they are an easy target for stealth tax rises. They will ultimately suck up whatever they are stuck with, much as they have with bonuses. Foreign banks do not have to like it or lump it, though. They can instead opt to relocate business to Frankfurt or elsewhere. That may limit how high the Treasury dares push the banking surcharge, levied on top of regular corporation tax. It might land closer to 5 per cent than the current 8 per cent. But it is not hard to see politicians resisting pushing it down to 3 per cent as had been previously planned when Sunak was chancellor.
Pet policies of the industry may no longer be quite the priority for government they once were either. The overhaul of Solvency II rules for the insurance industry has regularly been hauled out as one of the great, as-yet undelivered, Brexit dividends. It was to be at the core of Kwarteng’s Big Bang 2.0. But even if that was a term coined during Sunak’s time at the Treasury, he did not accord financial services reform quite the same front-line policy status. It is hard to imagine the issue retaining political focus when the new Conservative prime minister has a maximum of 27 months to restore the party’s credibility and recapture the public imagination ahead of a general election.
The limits of the legislative timetable was a problem that Kwarteng faced too: in talks with City leaders he was upfront that ideas for Big Bang 2.0 had to be capable of delivering that bang within a two-year horizon. There was more than a little risk that rhetoric ended up running ahead of reality, the City ending up with a set of solid reforms but not much else.
Still, the scope for a grand vision of any kind will be more of a hostage to timetable than ever now that Sunak and his chancellor have to first show the books can be balanced. Some businesses regard that as just as well, the Britannia Unchained vision being what landed the UK in real trouble in the first place. But it does not bode brilliantly for the UK’s growth problem, correctly identified by Truss and Kwarteng if not correctly addressed. While Sunak as chancellor showed himself well aware of growth challenges, his efforts to address them were seen as underwhelming even before the public finances were quite so strained.
Reboots often disappoint. Sunak’s return to Downing Street has the advantage that expectations are now extremely low. For the City, boring is back. A twist-free turn in government would be welcomed.
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