With a general election in the UK likely to take place at some stage during the second half of 2024, investors are starting to consider the implications of a possible change of government. Opinion polls give the Labour Party a 20-percentage point lead over the ruling
Conservatives, and modelling suggests that Labour will form the next government with a comfortable majority1. In this month’s commentary, we look at what a future Labour government might mean for business conditions in the UK.
In the not-too-distant past, the prospect of a Labour government would have filled the business community with dread. Under the leadership of Jeremy Corbyn, a self-declared socialist who headed up the party between 2015 and 2020, the Labour Party made a dramatic shift to the left. The Corbyn Labour party fought the 2019 election on a platform of large increases in government spending funded by increased taxes on corporations and the wealthy, the nationalisation of key industries (such as railways, energy, and water), a big extension of workers’ rights, and changes to corporate governance.
Against this backdrop, it is no wonder that business cheered the victory of then Prime Minister Boris Johnson in 2019. However, both the Conservative party and the Labour party have changed dramatically in recent years, with the latter becoming more business friendly and the former arguably becoming less so.
Not so business-friendly Tories
Take the Tories first. The Conservative party in the UK, with its preference for low taxes and deregulation has traditionally been seen as the ‘party of business’. However, this reputation has taken a severe blow over the last 10 years.
The party was responsible for the UK leaving the European Union (EU), and the ‘hard’ form of Brexit secured under the Johnson administration put up trade barriers with the UK’s largest trade partner, resulting in significant increases in red tape and business costs for firms trading with the bloc.
The Tories’ record on taxation has not been great either. Although the Conservatives like to be seen as the party of low taxation, the tax share of Gross Domestic Product (GDP) has risen in recent years and, at nearly 40% of GDP, is currently at its highest level since the early 1980s2. In 2021, Rishi Sunak, then Chancellor and currently the Prime Minister, announced that the rate of corporation tax would rise from 19% to 25% from 20233.
The rise in the tax burden might be seen as a necessary response to events beyond the Conservatives’ control, not least the need to fund higher public spending resulting from the pandemic and an ageing population. However, the debacle surrounding the mini-budget of September 2022 - when then Chancellor Kwasi Kwarteng announced a series of unfunded tax cuts which unnerved financial markets – was solely of the party’s own making. The mini-budget, which was not accompanied by analysis and forecasts from the Office of Budget Responsibility (OBR, the independent fiscal watchdog), sent Sterling to a record low against the US dollar and caused Gilt yields to spike, requiring the Bank of England (BoE) to intervene to stabilise the market.
Policy uncertainty
More generally, the last decade of Conservative rule has been characterised by extreme policy uncertainty, which has made it difficult for businesses to make long-term investment decisions. Uncertainty surrounding Brexit and the factional infighting that has culminated in multiple changes in leadership (four prime ministers and six chancellors over the last five years) during recent Conservative rule has created a sense of policy unpredictability.
Industry chiefs claim that doubts about the government's commitment to net zero and the delay in phasing out diesel cars and gas boilers are hampering private investment in the green transition4. The government’s decision to scrap the northern leg of HS2 has come in for similar criticism5.
With all of this in mind, it is perhaps not surprising that business investment as a share of GDP has fallen below that of the UK’s peers. Latest comparable figures show that whole economy investment amounted to 18.7% of GDP in the third quarter of last 20236. This marked the 13th successive quarter that the UK had the lowest investment share of GDP in the G7 group of large, advanced economies. Low levels of investment are seen as one factor behind the UK’s poor record on productivity, which in turn has held back the economy’s capacity to grow without generating inflation. Obviously, recent Conservative governments are not solely to blame on this front, but policy uncertainty has undoubtedly been a factor.
Reformed Labour
In contrast to the Conservative party in recent years, the Labour party under Keir Starmer has embarked on a charm offensive with industry leaders and become more business-friendly. Corbyn’s pledges to nationalise the public utilities, increase government spending, and raise corporate tax rates have been replaced with a more pro-business agenda: the promise of economic stability; a ‘partnership’ between government and the private sector; and supply-side reform.
Cognisant of the negative impact that recent political turmoil has had on business in recent years, Labour is keen to sell itself as the party of stability. To demonstrate that a repeat of the 2022 mini-budget fiasco will not happen under Labour, Rachel Reeves, the current Shadow Chancellor, has proposed that any significant tax and spending changes will, by law, be subject to independent analysis and forecasts from the OBR. To provide greater predictability and thereby enable businesses to take long-term investment decisions, Labour would also publish a ‘roadmap’ for business taxation within six months of coming to power and would cap corporation tax at its current rate of 25%7.
Rather than promise to spend big, Labour is now prioritising fiscal prudence and the need to establish credibility. With the tax burden already at multi-decade highs and the party unwilling to further ramp up borrowing, Labour has recently ditched its pledge to spend £28 billion a year on green investment. Moreover, Reeves has adopted the current government’s ‘fiscal rule’, which dictates that public debt as a share of GDP must be falling by the fifth year of the OBR’s forecast. In addition, Reeves has indicated that a Labour government would move to a fiscal rule that targeted day-to-day spending instead of the overall deficit, which Labour suggest will improve the outlook for long-term investment.
Fostering private investment
With public funds limited, boosting private sector investment will be a key goal for Labour if it wins the election. Detailed proposals are lacking, but broad policy aims include: the ‘crowding in’ of private investment in conjunction with public investment delivered via a National Wealth Fund; overcoming the barriers to pension schemes investing in UK PLC; and the extension of the funding cycles of key Research & Development institutions to foster meaningful ‘partnerships with industry’.
Although several studies suggest that Brexit has been a key factor behind low levels of investment in the UK8, Labour has no plans to rejoin the EU if it wins the election. Given Labour’s desire to claw back so-called ‘red wall’ constituencies (which predominantly voted to leave in 2016), it is perhaps not surprising that Starmer has promised not to reverse Brexit.
Rather, Labour is likely to try and build better relations with the EU and improve the existing Trade and Cooperation Agreement (TCA). The TCA is due to be reviewed in 2026, but, given that the EU has other priorities (not least the ongoing war in Ukraine) and is quite content with the current arrangement, it seems unlikely that Labour will be able to secure a significantly enhanced deal.
Reform of the domestic economy is likely to be a priority. Reeves, along with many other observers, has highlighted the UK’s planning system as ripe for reform, describing it as “the single greatest obstacle to our economic success”9. Reeves reckons that the UK’s dysfunctional planning system has resulted in land that is costly and inefficiently utilised, making infrastructure projects and housing more expensive than they should be. Labour plans to streamline administrative processes, fast-track applications for high-value private-sector projects (e.g. battery factories, digital infrastructure etc.), recruit more planners, and create the conditions to build 1.5 million homes over the course of the next parliament10.
This all sounds hopeful. But whether Labour will succeed in overcoming the vested interests that are opposed to increased construction and homebuilding remains to be seen, and a shortage of skilled tradesmen will also limit the capacity for further expansion11.
Planning aside, the scope for further deregulation and supply-side reform to drive investment and economic growth appears limited. Labour plans to cut ‘red tape’ across a range of sectors, including financial services, agriculture, and healthcare. However, in broad terms, the UK economy is already quite lightly regulated. By way of illustration, in the World Bank’s “Ease of Doing Business” survey, the UK ranks 8th among 190 countries globally12. This suggests the payback from further deregulation might not be that great. Moreover, the benefits of supply-side reforms are likely to take a long time to show up, and in the public sector (e.g. the NHS) could be difficult to achieve without increased spending.
Workers’ rights
In other areas, Labour’s plans to improve workers’ rights do not appear particularly business-friendly. Labour has pledged to ban zero-hours contracts, and Reeves has said that a future Labour government would guarantee basic workers’ rights (protection from unfair dismissal, sick pay, and parental leave) from ‘day one’13. Although no specific numbers have been mentioned, Labour have suggested that they will oversee an increase in the minimum wage and the national living wage, by changing the Low Pay Commission’s remit to take the cost of living into consideration.
There is some evidence to suggest that improving workers’ wellbeing can boost productivity and profits as a result of reduced labour turnover, increased worker engagement and enhanced skill development14. However, Labour’s proposed changes could hurt some businesses (or trigger price increases), most notably in low-pay sectors such as hospitality and retail. Perhaps unsurprisingly, there have been reports that the Confederation of British Industry (CBI) is pushing Labour to water down its plans15.
The true ‘party of business’?
Nevertheless, despite some misgivings, several opinion polls suggest that firms in the UK now see Labour, and not the Conservatives, as the ‘party of business’ . Clearly, some industries will be more averse to the prospect of a Labour government than others: the planned closure of the ‘carried interest’ tax loophole will not be welcomed by private equity bosses and hedge fund managers that have used it to reduce their tax bills17; and Labour’s planned extension of the windfall tax on oil and gas companies has faced fierce opposition in the energy sector18.
The degree to which the UK business community’s new-found fondness for Labour reflects a genuine enthusiasm for the party’s policies or merely a desire for respite from the turbulence of the Tory years is open to debate. Expectations for a swift turnaround in the economy are not high. The fallout from Brexit will continue to be a drag. And the payback from supply-side reforms in terms of boosting private sector investment might be limited. Structural change will be difficult to pull off and will take time to yield results. If Labour sticks to its self-imposed fiscal rules in a bid to establish credibility, the party will face tough tax and spending decisions, which are likely to bring internal divisions to the fore. However, even with these caveats, the prospect of a period of relative stability under Labour appears to be one that businesses should welcome.
16 April 2024
1 https://www.theguardian.com/politics/ng-interactive/2024/mar/18/uk-general-election-opinion-polls-tracker-latest-labour-tories-starmer-sunak
2 https://commonslibrary.parliament.uk/research-briefings/cbp-8513/
3 https://commonslibrary.parliament.uk/research-briefings/cbp-9178/#:~:text=In%20the%20Spring%202021%20Budget%20the%20then%20Chancellor%2C%20Rishi%20Sunak,%C2%A3250%2C000%2C%20from%20April%202023.
4 https://www.icaew.com/insights/viewpoints-on-the-news/2023/sep-2023/investors-alarmed-at-uk-net-zero-policy-uncertainty
5 https://www.theguardian.com/uk-news/2023/oct/04/industry-backlash-at-sunaks-damaging-u-turn-on-northern-leg-of-hs2
6 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/businessinvestment/julytoseptember2023revisedresults
7 https://labour.org.uk/updates/press-releases/rachel-reeves-mais-lecture/
8 https://www.bbc.co.uk/news/business-64623488#:~:text=Mr%20Haskel%20described%20the%20hit,per%20household%2C%22%20he%20added.
9 https://labour.org.uk/updates/press-releases/rachel-reeves-mais-lecture/
10 https://labour.org.uk/updates/press-releases/how-not-if-labour-will-jump-start-planning-to-build-1-5-million-homes-and-save-the-dream-of-homeownership/
11 https://www.chas.co.uk/blog/3-challenges-facing-the-uk-construction-industry-in-2024/
12 https://archive.doingbusiness.org/en/data/exploreeconomies/united-kingdom
13 https://labour.org.uk/updates/press-releases/rachel-reeves-mais-lecture/
14 https://wrap.warwick.ac.uk/63228/7/WRAP_Oswald_681096.pdf
15 https://www.theguardian.com/business/2024/feb/20/unions-labour-workers-rights-zero-hours-contracts-tuc-cbi
16 https://www.cityam.com/uk-entrepreneurs-prefer-labour-as-party-of-business-survey-finds/
17 https://www.politico.eu/article/labour-heads-battle-city-most-ruthless-predators-tax-break-uk-rachel-reeves/
18 https://www.politico.eu/article/oil-gas-company-lash-labour-party-windfall-tax-plan/