Does Rachel Reeves believe in capitalism?

The Chancellor can’t do the biggest things she needs for growth because she can’t escape her own ideology, says Helen Thomas

Spin only gets you so far in the business world. Action has to back up rhetoric or the game will be found out. This is the main difference between business and politics: the former is about what works whereas the latter is about what sells. The most powerful leaders in each world adopt a little bit of both, whether it’s Trump’s tax cuts to Make America Great Again or Jamie Dimon’s ruthlessly successful acquisitions. The UK Chancellor is trying to move from the tearful reality of her fiscal constraints to the smile that welcomes capital into Britain. Unfortunately, tweaking regulations to meet a shopping list of demands from the City’s big lobbyists does not a successful salesperson make.

The ”Leeds Reforms” and her Mansion House speech provide a good spin but business is judging her on her actions, not words. The smoked salmon and scrambled eggs offensive in the run up to the General Election turned into thin gruel. At her very first Budget she delivered a wholly unanticipated rise in employer’s national insurance contributions – something which she herself in opposition had rightly recognised as a tax on jobs. Rather than be as intensely relaxed about the rich as Peter Mandelson had been after the last big election win for Labour, she delivered policies squarely aimed at those accumulating wealth. She changed inheritance tax rules, penalised family firms for handing the company down through the generations and raised taxes on carried interest and capital gains. No amount of spin can change the impression that has already been made by actions that have already been taken.

Reeves believes capitalism betrays voters

The truth for business is that Rachel Reeves cannot escape her own ideology. She revealed it in her 2024 Mais Lecture, that “a model based on the pursuit of narrow-based, narrowly-shared growth – with ever-diminishing returns – cannot produce adequate returns in growth and living standards, and nor can it command democratic consent”. In short, capitalism not only doesn’t work, it betrays voters. Government must step in. She argued then that “Securonomics advances not the big state but the smart and strategic state”. In her FT opinion piece she refers to how the Leeds Reforms are an example of this ideology; they “deliver on my commitment to regulate for growth”.

But growth cannot be regulated for. Wealth creation cannot be mandated by government. The point of capitalism is for private capital to find its way to productive projects. Government can remove barriers to entry and police the rules but it can’t rewrite the rules of investment. This is where her attempt to solve an undoubted problem, that the UK equity markets struggle to scale capital, runs into an ideological roadblock. She can’t tell British retail savers to buy UK firms, nor force money into British stocks by tweaking listing regimes. She has to create an environment in which those firms can thrive and then they can compete more effectively for capital. The invisible hand becomes the clunking fist through too much government intervention.

Wealth creation cannot be mandated by government. The point of capitalism is for private capital to find its way to productive projects

It can also lead to unintended consequences. Whilst her changes to loan-to-value rules deliver on a manifesto promise to create a “Freedom to Buy” scheme for homes for first-time buyers, it once again destabilises the natural supply and demand of the housing market by increasing leverage so that buyers can meet higher prices. But of course no politician has yet been brave enough to let house prices fall to such a degree that a new generation of buyers can get their foot on the ladder. If a Labour government with such a huge majority can’t do something unpopular with the home-owning class, then the housing market will likely never find its true clearing price.

It wasn’t just housing that made its way into the Leeds Reforms. Listing regimes, the Senior Managers Regime, digitisation and ringfencing have all been tweaked, or promised a consultation for tweaks. Whilst some are welcome, it is hard to hang them together into a consistent narrative that makes sense to investors and wealth creators. This was a sales story with something for everyone in the City; and yet, in aggregating the list, the sum total appears to be less than its parts. What is the overarching story of this government’s approach to financial services? One year into its term and there is no clear plan for the future nor actual evidence that the list of tweaks will deliver the growth the country so desperately needs. Just a government that wants to do a great number of small things rather than a small number of great things.

Helen Thomas is founder and CEO of Blonde Money