The animal spirits of British business need to be lifted

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When more than 200 global business leaders gather next week for this government’s first UK international investment summit, they will not have high hopes. Business confidence is sagging, rich foreign residents are leaving and financiers are fearful.

It is hardly surprising. Sir Keir Starmer opened his premiership by declaring that the UK’s finances were “worse than we ever imagined” and taxes are expected to rise in this month’s Budget. The “animal spirits” that the economist John Maynard Keynes wrote were vital to investment are low.

My conversations this week with senior executives, including some who will attend the summit, felt like therapy sessions for people who had raised their hopes, only to have them crushed. One had just watched two videos made by entrepreneurs packing their London homes to depart. Another doubted that the government understood business, despite its friendly rhetoric.

Come on, guys, get a grip. You are supposed to be can-do optimists, I felt like responding. The government is barely 100 days into what has been a faltering start and the investment regime is unchanged yet. There are hints that chancellor Rachel Reeves will not raise capital gains and other taxes as much as feared; life may be tolerable.

But the mood needs to lift because moods matter in business and for consumer confidence. They are especially vital for an economy that has relied heavily on international investment, as well as talent and business expertise, since the 1980s. The long-term impact of this week’s employment rights bill will be closely watched.

Some of the gloom is attributable to investors and executives having hoped that greater stability would succeed years of post-Brexit Conservative infighting. That was the promise, after all. “The chaos of the last 14 years is no more. Britain is open for business,” Jonathan Reynolds, business secretary, insisted in August. But that already feels like a long time ago.

There is progress in areas where Labour feels instinctively comfortable: planning reform and infrastructure linked to the energy transition. It has announced £21.7bn of support for the UK’s first carbon capture and storage project. Like Joe Biden’s US administration, albeit with less money to allocate, it wants to incentivise investment for net zero initiatives.

This kind of dirigisme, beloved by Ed Miliband, energy secretary, will get a good reception from infrastructure funds and Gulf investors. Long-term projects with embedded subsidies to build wind farms and energy grids always find takers. Global capital loves a state-backed bargain.

Some intervention is necessary. UK infrastructure is inadequate and the City grandee Sir Nigel Wilson estimated last month that £1tn of investment is needed over the next decade. The Conservative peer Lord Richard Harrington declared last year in his investment review that “capitalism has changed” and state direction was needed.

But intervention is not sufficient. The worry is what happens away from summits and pledges to the fabric of business. Capitalism may have changed in infrastructure, but has it in sectors such as technology and the creative industries, on which the UK will rely to raise growth? I doubt it. That would require human nature to change.

Those whose talents are in high demand will still switch jobs, and sometimes countries, for better opportunities; investors will demand returns on their capital; entrepreneurs will dream of getting rich in return for taking risks. Dampen such dynamism with excessive regulation and higher taxes and the economy will feel the effects.

It may be unfair that such people have more choices than the average citizen who pays income tax, but it is the reality. Despite Brexit’s effects on trade, the UK is an open economy for capital and talent, both of which are mobile. Today’s exodus of foreigners who fear being trapped by high rates of inheritance tax could be followed by one of private equity executives.

The good news is that, despite everything, the UK still has plenty to offer. The global nature of the English language is a mixed blessing, since everyone can read the prime minister’s dire rhetoric, but many investors appreciate its legal institutions and culture. As one banker says, “Everyone wants to be here, although we do everything we can to put them off.”

The animal spirits of business rise and fall unpredictably. They need to be cultivated and I hope the government realises that. Tread lightly, for you tread on the British economy. 

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