‘The City can’t be taken for granted’: how banks won over Rachel Reeves

‘The City can’t be taken for granted’: how banks won over Rachel Reeves

The UK's opposition Labour Party, led on economic policy by Shadow Chancellor Rachel Reeves, has successfully courted the financial sector. Following a recent government budget that spared the industry from higher taxes, major international banks including JP Morgan and Goldman Sachs have signaled intentions to expand their UK presence, indicating a significant shift in the relationship between the City of London and its likely next government.

Context & What Changed

The relationship between the UK's Labour Party and the City of London has historically been fraught with tension, particularly during the leadership of Jeremy Corbyn, which advocated for policies perceived as hostile to the financial sector, such as a financial transaction tax. Since Keir Starmer became leader and Rachel Reeves the Shadow Chancellor, the party has executed a deliberate and sustained campaign to rebuild trust, often referred to as the "prawn cocktail offensive 2.0," harking back to New Labour's successful 1990s outreach (source: theguardian.com). This effort occurs against a complex backdrop: the UK's post-Brexit economic re-positioning, fierce competition from EU financial hubs like Paris and Frankfurt, and a domestic need for investment and stable tax revenues to fund public services.

The pivotal change is the tangible success of this charm offensive. The immediate catalyst appears to be the recent budget, where the sector was spared punitive tax rises. This was interpreted by the industry as a signal of a more pragmatic, pro-business policy environment, even under a potential Labour government. In response, JP Morgan and Goldman Sachs, two of the world's most influential investment banks, have publicly committed to expanding their UK operations (source: theguardian.com). This is not merely rhetorical; it represents a concrete vote of confidence and a de-risking of the UK's political future in the eyes of global capital. The shift is from a state of anxious uncertainty about a future Labour government to one of cautious optimism, where major financial institutions are willing to commit long-term capital based on the party's new positioning.

Stakeholders

1. Incoming UK Government (Labour Party): Led by Keir Starmer and Rachel Reeves, their primary objective is to project economic competence and stability to attract investment, thereby generating the tax revenue needed for their social programs. They must balance this with managing perceptions among their traditional voter base, which can be skeptical of close ties to high finance.
2. Global Investment Banks (e.g., JP Morgan, Goldman Sachs): These large-cap actors seek regulatory certainty, a competitive tax framework, and access to a deep talent pool. Their public decisions to invest or divest are powerful market signals. Their current expansion plans provide crucial validation for Labour's strategy.
3. The City of London Corporation & Associated Bodies (e.g., TheCityUK): These organizations are mandated to promote the UK's financial and professional services sector. They are key facilitators in the dialogue between industry and government, and this rapprochement is a core strategic victory for them.
4. UK Financial Regulators (Bank of England, Financial Conduct Authority): While independent, the overall policy direction from the government sets the tone. They will be responsible for implementing any changes to the regulatory architecture (e.g., the post-Brexit "Edinburgh Reforms") and will be watched closely for how they balance competitiveness with financial stability.
5. Competing Financial Centers (Paris, Frankfurt, Dublin, Amsterdam): These cities have actively sought to attract financial services firms from London post-Brexit. A more stable and attractive UK policy environment blunts their competitive advantage and may slow or reverse the relocation of assets and personnel.
6. UK Domestic Economy & Public: The broader UK population and businesses outside finance are stakeholders in the outcome. The success of this strategy will be judged on whether the tax revenues generated translate into improved public services and if the pro-business sentiment extends beyond the City to the wider economy.

Evidence & Data

The significance of this policy alignment is rooted in the financial sector's contribution to the UK economy. The sector contributed £173.6 billion in Gross Value Added (GVA) in 2022, representing 8.3% of the UK's total economic output (source: commonslibrary.parliament.uk). Furthermore, it is a critical source of public funds, with the total tax contribution estimated at £75.6 billion for the 2019/20 fiscal year (source: cityoflondon.gov.uk). Protecting this base is a matter of fiscal necessity.

The policy context includes the current Conservative government's adjustments to the tax regime. The UK's main corporation tax rate was raised to 25% in April 2023, but the specific Bank Corporation Tax Surcharge was simultaneously cut from 8% to 3%, resulting in a combined rate of 28% for banks (source: gov.uk). Labour's commitment not to raise these rates further is a key element of the current détente.

Post-Brexit job relocation figures provide further context. While initial forecasts predicted losses of over 75,000 jobs from the City, consulting firm EY's financial services tracker reported that as of late 2023, the number of roles relocated to the EU was closer to 7,000 (source: ey.com). While significant, this is far from the exodus once feared. The announcements by JP Morgan and Goldman Sachs signal a potential reversal of this trend, focusing on job creation and investment within the UK.

Rachel Reeves's public statements have been central to this shift. Her consistent message, encapsulated in the quote that "The City can’t be taken for granted," has been matched by policy signals, creating a credible and coherent narrative for investors (source: theguardian.com).

Scenarios (3) with probabilities

Scenario 1: Pragmatic Partnership (Probability: 65%)

A newly elected Labour government maintains a stable and competitive tax and regulatory environment for the financial sector. Reeves, as Chancellor, avoids populist tax hikes and focuses on regulatory streamlining, possibly building on the existing “Edinburgh Reforms” framework. This stability encourages further investment from international banks and asset managers, solidifying London’s post-Brexit role as a leading global financial center. Tax revenues from the sector remain robust, providing the fiscal space for Labour’s domestic agenda. This is the baseline scenario suggested by current events.

Scenario 2: Symbolic Taxation, Substantive Stability (Probability: 25%)

The government maintains its broadly pro-business stance, but faces pressure from its left flank or needs to raise funds for an unexpected fiscal challenge. This results in targeted, but not systemic, tax changes. Examples could include raising the tax on carried interest for private equity managers or a modest increase in the bank levy, while leaving headline corporation tax and the bank surcharge untouched. The City expresses displeasure, and future investment becomes more cautious, but there is no mass exodus. The core message of stability is slightly diluted but not broken.

Scenario 3: Ideological Reversal (Probability: 10%)

An external shock (e.g., a severe economic crisis) or a significant shift in the internal balance of power within the Labour Party leads to a reversal of the current pro-City stance. The government implements more radical policies, such as a Financial Transaction Tax or significant hikes to corporation tax and levies on banks. This shatters investor confidence, leading to an immediate halt in new investment, the relocation of mobile assets and personnel to rival centers, and a significant decline in tax revenues, creating a fiscal crisis for the government.

Timelines

Short-Term (0-12 months): In the run-up to the next general election (expected within this timeframe), Labour will continue its engagement, and financial institutions will finalize near-term investment plans. Market analysts will continue to price in a high probability of a smooth political transition.

Medium-Term (1-3 years post-election): The first budget of a new Labour government will be a critical milestone, watched for any deviation from the pre-election rhetoric. The government will begin implementing its regulatory agenda. The success of the policy will be measured by announcements of new jobs, office expansions, and investment flows.

Long-Term (3-5+ years): The cumulative impact on the UK's GDP, tax receipts, and London's market share relative to New York, Singapore, and EU hubs will become clear. The durability of the political settlement between Labour and the City will be tested by a full economic cycle.

Quantified Ranges

Public Finance: A stable and growing financial sector secures the annual tax contribution of £70-80 billion (source: cityoflondon.gov.uk). A 1% change in the sector's economic output could plausibly impact annual tax revenues by approximately £700-800 million (author's estimation based on public data on GVA and tax take).

Employment: The UK financial services sector employs over 1.1 million people (source: thecityuk.com). The policy aims to protect this base and foster growth. The announced expansions could translate into several thousand high-value jobs over the next 3-5 years, particularly in London.

Capital Investment: The expansion of headquarters and operations by firms like JP Morgan and Goldman Sachs represents direct capital investment likely in the hundreds of millions to low billions of pounds over a multi-year period, covering real estate, technology, and infrastructure.

Risks & Mitigations

Risk 1: Political Backlash: A significant portion of Labour's membership and voter base remains deeply skeptical of the financial sector. A perception that the party is too close to the City could create internal division and public dissent.

Mitigation: The government must proactively and transparently link the health of the financial sector to tangible public benefits, explicitly earmarking tax revenues from the City for popular programs like the NHS or regional infrastructure projects.

Risk 2: Global Economic Volatility: A global recession or financial crisis could severely impact the profitability of the financial sector, reducing tax revenues regardless of UK policy. This could make the government's pro-City stance appear to be a failed bet.

Mitigation: Maintain a robust and independent regulatory system to ensure financial stability. The government should pursue economic diversification to reduce over-reliance on a single sector and maintain fiscal discipline to build resilience against external shocks.

Risk 3: Failure to Deliver Broader Economic Growth: If the benefits of a thriving City are not perceived to be shared across the country, it will exacerbate regional inequalities and fuel political opposition.

Mitigation: Implement a genuine 'levelling up' strategy that uses the fiscal strength provided by the City to fund infrastructure, education, and technology hubs in other regions. Encourage financial firms to invest and create jobs outside of London.

Sector/Region Impacts

Sectors: The most direct beneficiaries are Financial Services, and ancillary Professional Services (law, accounting, consulting). The high-end Commercial Real Estate market in London will also benefit from increased demand for office space. Technology firms that service the financial sector (FinTech) will also see a more stable domestic market.

Regions: The immediate impact is heavily concentrated in London and the South East, where the majority of financial services jobs are located. The key policy challenge for the government will be to translate this regional success into national benefit. Failure to do so risks deepening the UK's already significant regional economic divides.

Recommendations & Outlook

For Government/Policymakers: Consistency is paramount. Maintain a clear and stable policy narrative both before and after the election. Work with regulators to establish a long-term, predictable framework for financial services that balances competitiveness with stability. Crucially, develop and communicate a clear strategy for how the revenues generated will be used to benefit all regions of the UK.

For Industry Actors/Boards: Continue the constructive dialogue with the likely incoming government. To support the government's political position, publicize commitments to UK-wide job creation, regional investment, and apprenticeship programs. While capitalizing on the improved environment, maintain robust contingency plans aligned with the scenarios outlined, particularly the risk of minor tax or regulatory changes (Scenario 2).

Outlook: The current trajectory strongly suggests a move towards the 'Pragmatic Partnership' scenario. (Scenario-based assumption): This rapprochement represents one of the most significant de-risking events in the UK political economy for several years. (Scenario-based assumption): We expect this stability to unlock a new wave of investment into the UK financial sector, provided the next government successfully navigates the political risks of managing its relationship with its base and the economic risks of a volatile global environment. The first 18 months of a new administration will be the critical period for cementing this new settlement.