What does a new Labour government mean for business?
July 18, 2024
Thursday, July 4, 2024, was not just another Independence Day for the US; it marked the end of one political era and the beginning of what was promised throughout the election campaign to be a very different one.
We are still in the very early honeymoon phase of the new regime, but already, the intended shape of future economic policy is clear, even if it may ultimately have to be re-configured at least partially when political ambition comes into sustained contact with harsh financial and fiscal reality.
What can the business world expect and how might it react? First, it’s worth setting out the initial details of Labour’s new approach to economic policy and especially its central tenet: to getting the UK economy growing.
Pulling the levers of growth
The new Chancellor set out a raft of proposals in her first speech in the role, including:
- Substantially reforming the planning system to combat endemic delays and nimbyism.
- Creating a National Wealth Fund.
- Establishing a Growth Mission Board.
- Setting up a Growth Delivery Unit within the Treasury.
In addition, other government announcements have covered:
- Using a new body, Great British Energy, to better manage the existing dysfunctional energy market.
- Implementing an Industrial Strategy Council.
- Appointing a Council of Economic Advisers.
The Chancellor also promised more news on turbocharging investment in critical infrastructure.
The sad saga of recent business investment achievement
Without improved levels of investment in business, delivering better GDP growth can never be transformed from an aspiration into a reality. The UK has a truly appalling record of under-investment going back decades, which is a puzzle considering the firm belief in our entrepreneurial and innovation instincts. Our blog on this topic provides details about this unfortunate situation.
What does business want from government?
A report in 2023 from the independent thinktank the Institute for Government suggested that the government’s thinking then was that a stable economy and tax incentives were the key factors prompting entrepreneurs and other investors to grasp growth opportunities. The new government has confirmed that the full tax expensing of capital spending will continue.
Surveys of entrepreneurs reveal a quite different view, however. Tax incentives such as full expensing are welcome, but few believe they could ever be the factor to clinch positive investment decisions. Other considerations are ranked higher by many, such as the availability of skilled labour, the existence of effective local transport and other infrastructure, as well as access to affordable housing. Above all else, what makes businesses invest is a tolerable level of economic and political certainty or at least the absence of too much uncertainty.
The new government’s initial announcements tick quite a few of these boxes, although only a reduction in policy uncertainty and full expensing are short term fixes. Creating the requisite housing, infrastructure and skills will take years to deliver.
Good news on the economy will help
The announcement that GDP grew 0.4% in May (double the expectation of economists) after stalling briefly at no growth in April will undoubtedly reinforce the feeling that the economy may have turned the corner. The fall in CPI inflation to the Bank of England’s target rate of 2.0% in May lends further weight to this change of mood, despite some residual concerns about the ‘stickiness’ of core inflation and services sector price rises, as well as the persistent high level of pay growth.
The one change that will confirm that better days are here at last would be a reduction in interest rates by the Bank of England, but the jury is still out on the timing and the extent of such cuts.
Business confidence is key
No matter what is happening in the economy more generally, or which incentives are in place or promised, the key factor driving business investment decisions is how business leaders interpret these data and whether or not it gives them the confidence to sign off on capital projects.
The latest Business Confidence Monitor published by the Institute of Chartered Accountants in England and Wales (ICAEW) for Q2 2024 shows a sustained increase in confidence, which is now at its highest level for two years, as businesses expect falling input price inflation to support further growth in demand and improved profits in the year ahead.
This report is based on research fieldwork done up to 22 June 2024, so it pre-dated the general election and the initial moves being made by the new government. It remains to be seen what these developments might do to further boost business confidence, how soon this confidence will be translated into actual business investment, and ultimately, how much this will impact growth and the strength of the UK economy.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.