When Keir Starmer’s Labour government swept into power last July, their ambitious promise to make the UK the fastest-growing economy in the G7 resonated strongly with voters. Six months into their tenure, however, the optimism of their campaign has been tempered by the harsh realities of governing in turbulent economic times ...
Despite Labour's initial pledges of bold growth and rejuvenation, the economic indicators paint a sobering picture. A consensus forecast of 1.3% GDP growth for 2025 signals modest expansion, but falls far short of the government's G7-leading ambitions. Adding to the pressure are soaring gilt yields, which have climbed to levels greater than the infamous market turmoil during Liz Truss's brief tenure as Prime Minister in 2022.
This fiscal backdrop has given rise to fears of further tax raids, a scenario described by Deutsche Bank as the Budget's "painful sequel." Such measures could further erode business confidence, already battered by a confluence of rising costs, uncertainty over US trade policy, and plummeting domestic demand.
From conversations with my own clients as well as with my peers in the accountancy world, I find a private sector grappling with reduced activity, hiring slowdowns, and curtailed investment plans. In manufacturing alone, output has plunged at the fastest pace since 2020, with a steep decline forecasted for the first quarter of the year.
At the heart of this retreat is the government's hike in National Insurance Contributions (NICs), which the Centre for Policy Studies has highlighted as particularly punitive. For employers, the cost of employing a full-time worker on minimum wage will rise from £1,617 in 2024 to £2,583 in 2025 which is an increase that threatens jobs and stymies growth.
Compounding these challenges are rising bond yields, which put additional strain on the Chancellor. Higher borrowing costs could force difficult choices: either raise taxes further or slash public spending. Both options risk dampening growth and exacerbating the private sector's struggles.
Economists widely expect the Bank of England to accelerate interest rate cuts, a move that could provide much-needed relief. Lower rates would ease borrowing costs for businesses and consumers, reduce household savings rates, and boost consumer spending which is a critical driver of growth.
KPMG forecasts GDP growth could rise to 1.7% this year, supported by increased household consumption as pent-up savings are unleashed. In parallel, the government's upcoming industrial strategy and proposed planning reforms aimed at infrastructure and housing projects could serve as catalysts for revitalizing economic momentum.
But the government faces an unenviable balancing act. While its long-term vision for a dynamic and thriving economy remains intact, the immediate task of rebuilding business confidence, encouraging investment, and fostering growth requires careful navigation of the fiscal and economic challenges at hand.
Success hinges not only on weathering the current storm, but also on laying the groundwork for sustainable growth that aligns with the bold promises that brought them to power. In my opinion, the government are doing the exact opposite of what they should be doing to bolster business confidence and grow the economy.
It remains to be seen if the government can get the economy growing again.
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