The London stock market has dropped out of the global top 20 as a place to raise money. Back in 2006, initial public offerings (IPO) raised $52 billion. In the first nine months of this year, it’s $248 million, making 2025 London’s worst year for listings in more than three decades. We’re now behind Mexico in the vibrancy of our capital raising ecosystem. This is not good.
What’s behind this extraordinary IPO collapse? The short answer is a daft policy introduced by Gordon Brown. But the longer answer is the cursed nature of politics itself, which does not reverse mistakes in the way that markets kill them off.
For example, we’ve just had the news that all Amazon Fresh stores in the UK are going to close. It seems that shops without tills don’t in fact work. Amazon has run the numbers, and the revenue gained from having a shop without a cash till isn’t greater than the costs of having a shop without a cash till. So, we’ll stop doing that then.
That is one of the grand advantages of markets. There are always many things that can be done, and as technology moves on, there are always new things that can be done. With limited time and resources, what we need is a method of sorting those things that should be done from everything that can be. Markets allow us to try everything, then do more of what works and less of what doesn’t. One of the joys of a market based economic system is the killing of what does not work. Unsentimentally, quickly and, to the extent possible, painlessly.
This is not how politics works. In politics, a mistake is perpetuated while ever more Heath Robinson (for Americans, Rube Goldberg) contraptions are invented to try to paper over the cracks. When it comes to the London stock market, the original mistake was the abolition of the pensions tax credit back in 1997 by, as already mentioned, one Gordon Brown. That took £5bn a year out of the income of those pension funds. Or, perhaps, a capital value of £100bn, in those real and heavy pounds of the 20th century. It’s all rather more now, given inflation and a larger economy.
The argument in favour of the tax credit was simply that pension funds are supposed to accumulate tax free. Corporation tax is paid on profits, then dividends are paid out of what’s left. So, if a pension fund is to be tax free on its income, then it should get back the corporation tax already paid on the dividend.
But, Gordon Brown. He and his advisers saw a sleight of hand tax change which the general public wouldn’t understand and which would grab more for Gordo to spend. Unfortunately their cunning scheme also meant pension funds were less likely to invest in London stocks, contributed to killing off direct benefit pensions and is at least partially responsible for London trading on a price-to-earnings ratio of 12 while New York is on 24. UK pension funds have gone from owning 50% of UK stocks before the change to just 5% now.
True, true, there are other things that haven’t helped – including London’s insistence upon varied ESG requirements. But Brown’s intervention made the decisive difference.
It has also long been pointed out around here that stamp duty on share purchases reduces share prices. Simply because that’s what transactions taxes do. And the lower share prices are, then the higher the cost of capital being raised – one has to give up more of a company to gain any particular amount of money. Given the differences in price-to-earnings ratios between London and New York, you get twice as much money for the same 20% of the company given up by floating in New York. Or, alternatively, the same amount for half the amount of stock. It’s really no wonder that the preference is for there not here – incentives matter, after all.
Why are London IPOs dying out? Because we’re taxing them too highly. If that was decided by a market, then we’d correct the mistake – reintroduce the pensions tax credit and solve our problem. But that is not how politics works, is it? Instead we’re getting Heath/Rube constructions: merging pension funds so they’ll invest more in UK stocks, or thinking about other schemes to force up demand for domestic equities.
The latest clever idea is to free new IPO shares from stamp duty for a couple of years. Which is, when you think about it, quite dismally stupid. So you’re agreeing that stamp duty lowers share prices, then? And share prices would be higher if there’s no stamp duty? But you’re not going to abolish stamp on all share transactions because…?
Politics never does go back and fix mistakes in the way that markets routinely cull such errors. Which is, obviously, why we should use markets more and politics less. We are in a world containing humans, after all – human error is going to keep happening. So we need to use the system that corrects – heck, kills – error best.
There’s just one more point here. Which is that if we are to use a system – politics – which does not correct its mistakes, then we really need to work very hard to make sure that politics doesn’t make mistakes. Which brings us to the current campaigns to increase taxes on the results of having invested: a 2% wealth tax; equalising capital gains and income tax rates; extending national insurance contributions or adding an investment surcharge on investment income; putting up corporation tax; limiting pension allowances to basic rate only. There’s a long list of things being suggested. Yet we already have our proof that increasing tax on having invested reduces the amount that will be invested. Not necessarily to the benefit of the economy either.
If people want another example of the same principle at work, look across the pond. Municipal bonds – everything from a state to the local sewage plant – pay lower coupons and interest rates than the Treasury itself. Those munis can and do – sometimes at least – go bust, so there’s credit risk and thus they should pay more. But they don’t, because interest from munis is exempt from Federal (and within state, of state) income tax. There’s a vast wall of money willing to invest without tax, such a vast wall that it drives down the cost of capital to those municipalities. Meaning more investment in those local issues.
Taxing the return to having invested – taxes upon investment income and capital gains – changes how much is invested and in what. So, if we increase the taxation of UK returns to investment, we’re going to reduce the amount invested in the UK. That’s just the way the world works – because incentives matter.
I’m resigned to the idea that we’re not going to reverse Gordon Brown’s mistake on taxing pension funds. But perhaps we could at least apply our minds to not making further errors which the future won’t correct.
After all, which current British problems do we think are going to be solved by less investment? Well, there we are then.
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