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Reeves's potential windfall tax will crumble FTSE 100 giants and "diminish UK's stature as global financial hub"

Journalist: John Choong (Head of Markets and Research), Newspage

ended 11. September 2024

The FTSE 100 could see most or all of its gains this year reverse course. Major oil and gas companies, as well as banks are in new Chancellor Rachel Reeves’ crosshairs, as she attempts to raise funds to cover the £22bn “black hole” in the country’s finances. The Chancellor could now be eyeing up a potential windfall tax on these corporations despite saying before the general election that there were no such plans to do so.

If Reeves does decide to instil a windfall tax, it could have severe ramifications on Britain’s premier index. Heavyweights like Shell, BP, and HSBC make up the top five constituents of the FTSE 100. Altogether, the three constitute almost a fifth of the FTSE 100’s weighting (18.9%) – meaning that any significant movement in their share prices could sway the benchmark greatly.

North Sea giants are already paying a 35% Energy Profits Levy (EPL) based on the previous administration’s legislation, equating to a tax rate as high as 75%. However, Labour could hike the rate to 78% or higher, while also removing the ability to have any tax deducted if the money is spent on investment and exploration.

A similar increase for banks may be implemented as well. Banks already pay a levy – a charge introduced in response to the global financial crisis in 2008 to cover any future financial shocks. Currently, banks are taxed at a rate of 0.1% for short-term liabilities and 0.05% for long-term liabilities, but that could be doubled.

It’s also worth noting that energy and bank stocks make up 24.3% of the FTSE 100. As such, a windfall tax on these sectors could end up doing a lot of damage. In the near term, it would drastically reduce their profits, and impact their earnings per share, which is how stocks are usually valued. More worryingly, it could also damage the investment theses of these stocks and drive further investment away from an already beleaguered British stock market.

Newspage asked economists, analysts, and experts for their views on how this could impact foreign investment in the UK, the FTSE 100, and other measures the government could take to avoid harming the key sectors of the economy.

4 responses from the Newspage community

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Gabriel McKeown
Head of Macroeconomics at Sad Rabbit Investments
As Chancellor Reeves sharpens her fiscal scalpel, the UK investment market braces itself for the impending prognosis.

The introduction of windfall taxes on energy and banking sectors could be a double-edged sword for the UK's investment prospects. Despite the opportunity for these taxes to address fiscal shortfalls, the long-term impact on the UK investment market and the broader economy could be disastrous.

For banks, doubling the existing levy on liabilities could push them to reconsider their commitment to the UK market, diminishing the UK's stature as a global financial hub. Furthermore, with the FTSE 100 heavily weighted towards energy and banking, any negative impact on these sectors could cast a shadow over the UK's appeal on the global investment stage.

As the UK government tightens its fiscal belt, it could be about to strangle its investment golden goose. Instead, it must carefully balance the immediate budgetary needs with the potential long-term economic consequences.
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Daniel Hobbs
Managing Director at New Leaf Distribution
A potential windfall tax could have significant implications for the UK stock market. While the exact impact would depend on the specifics of the legislation, potential consequences include reduced profitability for targeted companies, negative investor sentiment, sector rotation, and economic uncertainty. It's important to carefully consider the potential consequences of such a policy change.
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Michelle Lawson
Director at Lawson Financial
Another example from Rachel Reeves about how to make friends and influence people. Labour are rapidly turning into tax grabbers which could be disastrous for the economy. Taxing business further will only restrict investment and make the UK an unattractive place to trade. Be careful what you wish for as by the time they have finished their raid your pockets could be more empty than they are at the moment.
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John Choong
Head of Equities and Markets at Investors Edge
As the FTSE 100 grapples with equity outflows, delistings, and takeovers, Reeves' proposed windfall taxes threaten to exacerbate its woes. With foreign investment already near a 12-year nadir, this "windfall" might prove a pyrrhic victory, and sets a dangerous precedent for further tax hikes.

The likely decline in oil, gas, and banking stocks that are FTSE stalwarts, could leave a void other sectors struggle to fill. Healthcare, another heavyweight, offers limited upside, with AstraZeneca already trading at a lofty forward P/E of 29. Meanwhile, global manufacturing headwinds constrain industrials and miners to trade higher.

Reeves’ tax raid risks clamping down on economic growth which could potentially decrease the perceived equity risk premium and trigger further UK equity outflows. Thus, in this high-stakes game of economic Jenga, Reeves must tread carefully. One wrong move could send the whole tower tumbling, with a potential repeat of the infamous 2022 mini-budget.