Business news 8 July 2024
Starmer hints at tough decisions to fix broken Britain and more political reaction to the new government. Services sector recovers, pay inflation, markets, small company takeovers, insolvencies, & more business news that we thought would interest our members.
James Salmon, Operations Director.
Starmer hints at tough decisions to fix broken Britain
On his first full day in Downing Street the Prime Minister warned that it will take time to fix Britain’s “broken” public services. Asked on Saturday whether he would be willing to raise levies to fund public services, Sir Keir Starmer said tough decisions would have to be taken and “we will do that with a raw honesty”. Sir Keir added: “But that is not a sort of prelude to saying there’s some tax decision that we didn’t speak about before that we’re going to announce now. It’s about the tough decisions to fix the problem and being honest about what they are.” He went on to say that the election result gave Labour a mandate “to do politics differently” and govern all four corner of the UK. But polling expert Sir John Curtice explains in the Sunday Telegraph how the public didn’t actually flock to Labour at all and its support has in fact dropped – he was barely any more successful than Jeremy Corbyn in 2019. Overall, the turnout at the general election was the lowest in more than 20 years. Sir John warns: “In winning few votes but many seats Labour now finds itself with nearly 100 MPs who enjoy majorities of 10 points or less. They could soon become restive if Sir Keir Starmer cannot persuade voters he is indeed providing the better government they seek.”
Tax hikes could put growth at risk
Goldman Sachs has upgraded its forecasts for UK growth for the next two years following Labour’s win on Friday, predicting economic expansion of 1.6% in 2025, slightly higher than its previous forecast of 1.5%. However, this is likely to be driven by higher public spending in the short-term with the risk of higher taxation likely to threaten investment. An increase in the minimum wage will also keep interest rates higher for longer, Goldman said. Capital Economics also upgraded its forecast adding that it expects the Bank of England to cut rates from 5.25% now to 3% by next year. Elsewhere, Richard Houston, chief executive of Deloitte UK, said the election result would “bring stability and bolster business and investor confidence” but Gaurav Ganguly at Moody’s said Labour’s growth promises would be difficult to finance without either borrowing significantly more or raising taxes further.
Business lobbies call for focus on growth
The new Labour government has been advised by influential business groups to stay “laser-focused” on delivering economic growth. Louise Hellem, the chief economist at the Confederation of British Industry, said: “Businesses will be looking at the general election, and the clear mandate given to the incoming government, as a reset moment for the economy. That means looking to the new government to hit the ground running and staying laser-focused on delivering growth. It’s those tough decisions, taken early, that will help us to attract investment, seize growth opportunities and revitalise our pitch to global investors.” The view was echoed by Shevaun Haviland at the British Chambers of Commerce, who said: “Our message to the new government is clear. We need a long-term economic plan that has the green transition at its heart, with a workforce fit for the future, living in thriving local places and powered by businesses that are globally facing and digitally enabled. Business stands ready to work in partnership with government to capitalise on the positive signs our data is showing.”
UK’s services sector recovery expected to boost economy
A recovery in the UK’s services sector is expected to help push the economy back into growth, resuming the recovery from last year’s shallow recession. City economists expect the economy to grow 0.2% in May thanks to a solid expansion in services and a recovery in construction. The UK has recovered from a technical recession last year, but more broadly, the economy is just 1.8% larger than it was on the eve of the pandemic. Many economists think that a Labour government could be supportive to growth, with analysts at Goldman Sachs raising their growth forecasts by 0.1 percentage points for 2025 and 2026 after the results were confirmed.
Pay inflation puts rate cut in doubt
Pay for full-time staff rose in June at the fastest pace in eight months, casting doubt on whether the Bank of England will cut interest rates at its next meeting in August. According to the latest Report on Jobs from KPMG and the Recruitment and Employment Confederation, pay growth for permanent staff climbed to its steepest level since October. The rate of salary growth is likely to concern the Bank’s ratesetters, who previously stressed that high wages growth risks entrenching strong inflation in the services sector, forcing them to keep borrowing costs high.
Closer ties with the EU
The new Foreign Secretary, David Lammy has made his first trip overseas to the German capital Berlin. The German Foreign Ministry said that the new Labour government is working with Berlin to work out how the UK “can move closer to the EU.” Germany’s Foreign Office wrote on X “The United Kingdom is our close friend and partner. Together we stand up for democracy and freedom in the world. Adding “The United Kingdom is an indispensable part of Europe. Whether in science, culture or security – (Germany) and (Britain) work closely together: We are working with the new UK Government to see how the UK can move closer to the EU.”
However, the British Foreign Secretary who did vote for Remain, said before his departure that it is now time to put the “Brexit years behind us.” adding “We are not going to rejoin the single market and the customs union but there is much that we can do together.”
CGT hike will harm business dynamism
Researchers at the University of Warwick and the London School of Economics have determined that nearly three quarters of the people who benefit from capital gains in Britain are aged over fifty, while 68% of all taxable gains covered by the tax come from the sale or liquidation of businesses. The analysis also revealed men receive 74% of the UK’s capital gains by value, so older men selling their businesses are most likely to be hit by a hike in CGT by Labour. Arun Advani, associate professor at the University of Warwick, warned that increasing “would be bad for business dynamism”. He explained: “The downside of raising rates is that you encourage people to either leave and liquidate or hold until death, even when they don’t really want the business anymore, to get the gains wiped out.” The new Chancellor, Rachel Reeves, previously called for CGT to be brought in line with Income Tax.
Wealthy Brits take action to protect finances
Wealthy households in Britain are making changes to their finances in anticipation of a potential Labour tax raid. Concerns about capital gains tax (CGT) hikes and the end of generous pension allowances have prompted wealthy individuals to sell off investments in shares. Some are also putting their properties up for sale to realise gains before any changes to CGT rules are implemented. Wealthy households are also considering relocating outside of the UK to avoid tax increases. Some are moving to countries like Cyprus or Malta, which offer attractive CGT perspectives. Nick Ritchie, senior director of wealth planning at RBC Wealth Management, comments: “Those who have decided the new Government will raise taxes, including increasing the scope of CGT and IHT, are accelerating the disposal of assets, gifting or relocating already.”
Takeover of small UK companies at 12-year high
Low stock market valuations and rising confidence have led to a surge in mergers and acquisitions of UK small companies. In the past year, 37 companies listed on Aim, London’s junior stock market, were acquired by overseas rivals and private equity firms, according to research by UHY Hacker Young. This is the highest level in 12 years. The cheap valuations of London-listed companies, compared to their US counterparts, have driven this trend, Wright said, adding that there were concerns that “US private equity funds will pick the best fruit from the tree but nothing will grow to replace it.”
UK consultant numbers shrink as companies cut back on external advice
The number of people employed in Britain’s consulting industry declined last year for the first time since 2020, according to a report by the Management Consultancies Association.
Markets
On Friday, London markets opened higher in a positive response to the new Labour government. However, share prices reversed as investors digested the latest US jobs report.the FTSE 100 closed down 0.45% yesterday at 8203.93 and the Euro Stoxx 50 closed down 0.16% at 4979.39. Over in the US the S&P 500 rose 0.54% to 5567.19 and the NASDAQ rose 0.90% to 5567.19 with Meta (Facebook) leading the way, rising to an all time high after releasing a new approach to AI models.
This morning on currencies, the pound is currently worth $1.281 and €1.182. On Commodities, Oil (Brent) is down at $85.75 & Gold is at $2373. With stock markets, the FTSE 100 is up 0.1% at 8212 and the Eurostoxx 50 is up 0.5% at 5003.
The US Economy again added slightly more jobs than expected in June though the unemployment rate increased, the Labor Department reported Friday. Nonfarm payrolls increased by 206,000 for the month, better than the 200,000 Dow Jones forecast though less than the downwardly revised gain of 218,000 in May, which was cut sharply from the initial estimate of 272,000.
Goldman Sachs has upgraded its forecast on the UK economy following Labours decisive victory against the Conservative Party. Raising its gross domestic product forecasts to 1.6% and 1.5% for 2025 and 2026 (a 0.1% bump respectively), Goldman analysts said Labour’s agenda should provide a “modest boost to demand growth in the near term”.
Shell expects to take a hit of up to $2 billion after it suspended construction work on one of Europe’s largest planned biofuels plants and sold a refinery in Singapore. The oil and gas major said it expects the decision to stop building work on the biofuels plant in the Netherlands, which it announced earlier this week, to cost up to $1 billion. Shell started work on its plant in Rotterdam in September 2021 and it was meant to begin producing sustainable aviation fuel and renewable diesel by 2025.
Britvic
Carlsberg are to buy Britvic for £3.3 billion, as Britvic hails a very positive trading update and outlook. Britvic, which is a Hemel Hempstead, England-based soft drinks maker, behind brands such as Robinsons squash, said Britvic shareholders will be entitled to receive 1,315 pence for each share. This includes a special dividend of 25p per Britvic share and represents a 36% premium to Britvic’s closing price of 970p on June 19, being the closing price on the day prior to speculation around a possible offer.
Burberry
Burberry is mulling job cuts, with hundreds of roles possibly on the chopping block, the Telegraph reported. The luxury fashion firm has begun a 45-day consultation period, in a sign that hundreds of roles could be cut. The Telegraph reported employees are concerned that up to 400 jobs could go, largely in UK offices. Burberry employs around 9,000 workers across the globe.
City power brokers who could help Labour
The Sunday Times looks at the figures most likely to forge a role connecting the City and the new Labour government. Dame Amanda Blanc, the chief executive of Aviva, has praised Rachel Reeves, the Chancellor, and Labour for having the “same motivations” as top executives in its push for a stable, growing economy. Elsewhere, former PwC boss Kevin Ellis has been seen as a close confidant of Reeves and could adopt an informal role. Former Bank of England governor Mark Carney has also touted Reeves and was this year appointed to the advisory committee on Labour’s proposed National Wealth Fund. L&G boss Sir Nigel Wilson and outgoing HSBC chief executive Noel Quinn may also see themselves tapped.
Labour win and big weekend of sport expected to boost hospitality and retail
Consumer spending is expected to catch a boost from Labour’s election victory and a bumper weekend of sport, experts predict, with shops, bars and restaurants all expected to make gains. Research from analysts at GlobalData and PwC shows an election often boosts spending. Kien Tan, a senior retail adviser at PwC, said: “I wouldn’t be surprised if there was a bit of a boost. We have had a year of real income growth, so people should feel a bit more confident to go out. July will get a bit of a halo.”
Reeves to tear up planning rules to accelerate building
The Chancellor will today announce plans to boost Britain’s economy using planning reform as one of the first steps to achieve sustained economic growth. Rachel Reeves will use her first major speech to announce mandatory targets for councils to build thousands of new homes and plans to weaken protections for some parts of the green belt. Planning rules for major infrastructure projects could also be relaxed under plans being examined by ministers. “We face the legacy of 14 years of chaos and economic irresponsibility,” Ms Reeves will say. She will outline how lost opportunities cost Britain an additional £58bn in tax revenues last year alone.
Labour’s victory boosts housebuilders
Housebuilders have been buoyed by Labour plans to build on the green belt with shares in Britain’s largest developers jumping on Friday. Barratt surged 1.2%, while shares in rivals Persimmon and Taylor Wimpey rose by 2% and 1.4%, respectively. Analysts at Investec said they expected Sir Keir Starmer to reinstate local authority housing targets and ease planning rules to boost supply.
Labour to boost HMRC’s power to tackle avoidance
HMRC is set to receive £855m and strengthened powers to crack down on tax avoidance and hunt down tax dodgers if Labour fulfils a manifesto promise. Labour plans to use money raised by closing non-dom status and offshore trust loopholes to fund the tax avoidance clampdown. The party aims to increase registration and reporting requirements, invest in new technology, and build capacity within HMRC.
Reeves urged to bring back the Office of Tax Simplification
Rachel Reeves has been urged to resurrect a strengthened version of the Office of Tax Simplification in one of the first pleas from business to the newly appointed Chancellor. Tax experts argue that a beefed-up agency is needed to tackle the tax traps and cliff edges that complicate the tax system and distort incentives in the economy. The Office of Tax Simplification was set up in 2010 but abolished in 2022. MPs and the Treasury select committee have called for its reinstatement. Phil Blackburn, senior tax partner at Lubbock Fine, says that a re-created “OTS on steroids” is necessary to lobby for improvements to the tax system. Andrew Snowdon, head of tax at UHY Hacker Young, adds: “Tax simplification needs to be put back on the agenda.”
Labour needs to evolve its relationship with business
PwC senior partner Marco Amitrano writes in the Times on how Labour must forge a new relationship with business based on trust. Surveys by the Big Four firm previously found business leaders felt a lack on interaction from political leaders when designing policies. Labour’s courtship of business will now have to evolve “into a balanced, robust relationship” borne from greater interaction with not just business leaders and ministers, but local government, planning authorities, industry bodies, trade unions and educators. Skills, technology and infrastructure should be key areas of focus, Amitrano says, and long-term projects need to be as divorced from politics as possible to give investors and suppliers confidence.
Labour’s tax plans remain unclear
Several papers look at what could be in store tax-wise following Labour’s victory in the general election. Incoming Chancellor Rachel Reeves has ruled out a Budget before September and assured voters there will be no surprise tax changes. Labour has promised not to raise income tax, national insurance, VAT, or corporation tax, but there are concerns about potential raids on capital gains tax, inheritance tax, council tax, or pension tax relief. But Labour’s lack of clarity and potential need to raise funds means experts can only speculate on which taxes will be targeted. Advisors provide tips on how to mitigate various tax grabs, with the Telegraph even including a guide on how to move to the US to enjoy a lower tax burden. If you move to Santa Monica you might even bump into Rishi Sunak who owns an apartment on Ocean Avenue.
Some taxing ideas for Labour from around the world
The Sunday Telegraph considered the various taxes on wealth that could inspire the new Labour government, such as a tax on swimming pools as levied in France. Taxes on SUVs are enormous across the Channel too while the UK is seen as a tax haven for luxury 4X4s – in France, a levy of £51,415 is put on the sale of a BMW X5 compared with £1,565 in the UK. Argentina previously levied a 50% tax on cars worth more than approximately $30,000 while Chile brought in an annual 2% tax on certain luxury goods held in the country in 2022. Back in Europe, Denmark is now taxing cows in a brutal hit to farmers as the country looks to cut CO2 emissions. Finally, Sri Lanka will next year impose a tax on the estimated rent owners of second homes could generate, with the country’s Ministry of Finance saying the tax would focus on high wealth individuals, and not on average income earners. Elsewhere, the Mail on Sunday joined a raft of papers recently to propose lower tax jurisdictions to worried, sun-deprived Britons. A note on crime rankings helps readers zero-in on the best destination
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