Britain’s Labour party came to power on a mandate to boost the UK’s underperforming economy. In its first five months in government it has made the task even harder by sapping the “animal spirits” of British businesses. Months of gloomy pronouncements before its inaugural October Budget had already damaged confidence. Far from repairing the damage, the Budget left employers reeling from the £40bn in tax rises it delivered — the bulk of which will be shouldered by them.
On Monday the director-general of the CBI, a lobby group, said businesses were rethinking their plans to invest, expand and hire following measures unveiled in the Autumn Budget. Earlier this month major British retailers also wrote to the chancellor Rachel Reeves, warning that annual costs across the sector could rise up to £7bn. Data last week showed that business activity had shrunk in November for the first time in over a year.
Revenues had to be raised from somewhere. Labour needed to grapple with the tight finances and strained public services that it inherited from the Conservatives. Its Budget began the repair job. But the government has erred by front-loading too much of the burden on to the business community. The increase to employers’ national insurance, amounting to about £25bn, is particularly onerous. It may eventually be passed on in the form of lower wages and less hiring. And it is only one of an array of increased cost burdens, including an increase in the minimum wage, a tapering of pandemic-era reliefs to business rates, and new workers’ rights regulations which could cost £5bn annually.
The government should act swiftly to revive business morale. It needs the private sector to be driving job creation, investment and innovation, particularly as other elements of its agenda — including fixing public services and raising capital investment — take time to deliver a growth uplift. Labour ought to signal and prioritise plans in three main areas for the new year.
First, it should streamline regulations that hinder business growth. This includes accelerating — and being more ambitious with — plans to lower bureaucratic hurdles in the planning system. Starting to simplify Britain’s byzantine tax system, with its array of codes, reliefs and thresholds, would also ease compliance burdens on smaller firms. Continuing consultations with business to ensure employee rights reforms do not make hiring significantly riskier or costlier is important too.
Second, the government should make investing easier. Reeves has already promised no further tax increases for business. But there are other areas where she can help. Reform of business rates should be pulled forward. The property tax imposes an excessive burden and discourages expansion. Incentives would help as well. For instance, the government could widen the types of expenditures that qualify for full expensing tax reliefs. Cutting stamp duty on share transactions would support equity markets. These measures would boost receipts over time by propping up growth.
Third, Labour needs to get its trade and industrial strategy in shape. Plans for a reset in trading relations with the EU should be made more ambitious, along with broader initiatives to ease barriers with other major trade partners. Businesses will also be eager to see progress on proposals to crowd in private investment via new capital pools, such as via the National Wealth Fund.
After a decade of political turmoil, there was hope that stability under a government with a large majority might boost “UK plc”. If Labour continues as it has started, it will squander that opportunity. To deliver growth, the government needs to build the genuine partnership with business that it has promised.
