Friday’s market turmoil served as an early and crucial litmus test for the Labour government’s relationship with the City of London. The £6.4 billion plunge in bank stocks, following a tax proposal from a left-leaning thinktank, reveals a deep-seated suspicion among investors about the party’s intentions towards the financial sector.
The proposal from the IPPR—a thinktank often associated with Labour—for a windfall tax on banks was seen as a potential harbinger of the government’s direction. The idea of reclaiming the £22 billion annual “windfall” from QE fits with a narrative of fiscal redistribution that has made the City historically wary of Labour governments.
The market’s immediate and severe reaction, with NatWest and Lloyds shares tumbling, was a clear sign that this old suspicion remains potent. It suggests that investors are primed to believe the worst and will react swiftly to any perceived threat from a government they may not fully trust on economic matters.
How Chancellor Rachel Reeves responds to this episode will be critical. If she distances herself from the proposal, it could reassure the markets. If she entertains it, it could confirm the City’s fears and set the stage for a fractious and unstable relationship, potentially undermining her own government’s pro-growth ambitions.
A Litmus Test for Labour’s Relationship with the City
