Say what you like about this government, it has tried hard to address mounting concerns about the health of the stock market. Ministers have launched dozens of initiatives to boost flagging investor interest in UK shares and stem the flow of companies switching their listings to New York.
All these moves have one thing in common: little or no cost to the taxpayer. The City’s big ask for next week’s budget is much more expensive. Lobby groups UK Finance and TheCityUK are calling for the scrapping of the 0.5 per cent stamp duty on share purchases at a cost of about £3 billion a year.
Some City folk think it is crazy even to suggest it. “It is not going to happen and isn’t the right priority anyway,” says the head of government relations at a leading City firm. But lobbyists say they have been given a good hearing in Whitehall and hope they may get something.
The City has long complained that the tax undermines the UK’s competitiveness as most rival countries have lower rates or, in the case of the US and Germany, none at all.
In theory, scrapping the duty would increase UK share prices so reducing quoted companies’ cost of capital and boosting investment and growth. A study part-funded by the London Stock Exchange in 2007 reckoned it could increase prices by an eye-popping 7 per cent. Other researchers put the impact at nearer to 1-2 per cent. Last August, China announced a surprise halving of its 0.1 per cent duty and Chinese share prices rose more than 1 per cent on the day.
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Just as important, say campaigners, would be the boost to liquidity – the amount of trading in UK shares. Liquidity is a concern for companies who say low trading volumes in London make it harder for their investors to buy or sell large stakes without moving prices against them.
Many investment funds have rules limiting their holdings of assets with low liquidity. UK-listed fintech Kaspi said last month that the better liquidity was one reason it opted to raise $1 billion from a share issue in New York rather than London.
Some City experts say the liquidity problem is overstated while the Stock Exchange itself is in a bind. It hardly wants to highlight an issue that could discourage more companies from listing in the UK and it recently produced a not-entirely-convincing analysis showing that liquidity in London is as good as in New York.
In 2014, chancellor George Osborne made a gesture, scrapping the tax for companies on London’s junior Alternative Investment Market. The trading volume of AIM shares rose sharply though Charles Hall, head of research at brokers Peel Hunt, concedes that it is hard to isolate the impact of the duty change.
The Treasury has considered the case for a broader cut many times over the years and concluded the uncertain potential benefits were outweighed by the loss of tax revenue. But that was when the stock market was in much better health.
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Even the most enthusiastic advocates think there is no chance the government will scrap the duty for all shares. Yet it is smaller companies for which the liquidity issue is most acute and exempting those valued at less than £1 billion, similar to what France does, would cost perhaps £200 million in lost duty.
This may appeal more to Rishi Sunak’s free market instincts than other ideas for boosting demand for UK shares such as a British Isa with tax breaks for investing in domestic equities.
It would also present Labour with a dilemma. Cutting taxes to boost share trading is not what most of its activists dream of. Yet Sir Keir Starmer is desperate to prevent the Tories being seen as more pro-enterprise. Backing a stamp duty cut would be the most striking demonstration yet of how Labour has changed.
