Introduction and highlights
The Labour government has put kickstarting economic growth at the top of its agenda*. However, its stated ambition to have the highest level of sustained growth in the G7 will require significant financial investment, at a time when the UK has the largest national debt as a proportion of the economy since 1962. Rachel Reeves, the Chancellor of the Exchequer, acknowledged this in her Autumn Budget, saying that “the only way to drive economic growth is to invest, invest, invest”.
Is faster growth achievable? Investec Chief Economist Philip Shaw was recently joined by Lucy Fisher, Whitehall Editor at the Financial Times, to explore how fiscal mechanisms and policy changes might help improve the outlook.
Here are the highlights from their discussion.
Jump to a section:
The growth target feels ambitious
The Government has said it is targeting an average increase in economic growth of 2.5% per annum. This is ambitious, according to Investec Chief Economist Philip Shaw.
Since the end of the global financial crisis (2009), UK growth has averaged just 1.5% per annum. And, given that the labour market has been growing, the rise in productivity, or average output per hour, has been just 0.5% per year.
“To drive growth, the Government will need to increase public investment and encourage more private investment,” said Philip.
We’ve had historically low levels of investment in the past decade compared to comparably sized economies.
Despite debt levels, the government is increasing spending
The government plans to increase levels of state spending to improve standards of living and reflect economic growth in real terms. In the Autumn Budget, the Chancellor set out a £70 billion annual increase in public spending, which will be funded by £40 billion of higher taxes, as well as additional borrowing.
“We’ve had historically low levels of investment in the past decade compared to comparably sized economies,” said the Financial Times' Whitehall Editor Lucy Fisher. “Public services need some very significant cash injections if Labour is to achieve its missions, and essentially win the next election. It doesn’t seem that the Government could continue without upgrading hospitals, prisons and a lot of our transport infrastructure.”
With national debt now broadly equal to annual economic output (or gross domestic product), the Government is aiming to maintain fiscal credibility as spending increases.
Philip expected the government to change its fiscal rules to increase investment. This has transpired: the Chancellor’s new investment rules include the financial value of more government assets on the national balance sheet, thus increasing the room for manoeuvre.
“With the fiscal position where it is, it is critical for markets to be on board and share the view that Britain’s growth capacity will be enhanced over the medium term.”
Political stability should help generate business investment
The Labour government could be seen to offer political stability to private investors. “In the past eight years, we’ve had six prime ministers and seven chancellors. We've had endless changes to ministerial teams. We've had knife-edge votes in Parliament, and of course, we've had the turmoil of Brexit, Covid-19, and the Ukraine war,” explained Lucy.
“In contrast, this is a government with a huge majority, which means it will not have any problem getting its legislation through the House of Commons. I think that should give investors some level of confidence.”
In her Budget Statement, the Chancellor leant into this, pledging to “restore economic stability”.
With the fiscal position where it is, it is critical for markets to be on board and share the view that Britain’s growth capacity will be enhanced.
Clarity over tax changes was needed
The delivery of the Autumn Budget means greater clarity, Lucy and Philip agreed.
“Businesses need to know the future tax landscape before they make investment decisions,” said Lucy. “I think there may have been wobbles in business and consumer confidence because Labour delayed its first Budget.”
The increase in employers’ National Insurance Contributions was expected. The rate will rise by 1.2 percentage points to 15% in April and this will account for around £25 billion of the increase in tax receipts.
The Labour election manifesto proposed changes to how carried interest is taxed. However, Lucy predicted that the the measures delivered in the Autumn Budget would be less dramatic than some private equity investors had feared. Tax on carried interest is to rise from 28% to 32% in April 2025, but this is still well below the top rate of Income Tax (45%).
The overall package is pretty radical. The government is talking about building 1.5 million homes in the next five years and reinstating mandatory targets to help achieve that.
Housebuilding remains a priority
Planning reforms are set to remain a key part of Labour’s growth strategy. “The Government is talking about building 1.5 million homes in the next five years and reinstating mandatory targets to help achieve that,” said Lucy.
It has created a New Homes Accelerator to try and help large-scale developments that are encountering delays or obstacles caused by regulations or local authority capacity. It has also founded The New Towns Taskforce with the aim of identifying potential locations for new developments and attracting investment. The Autumn Budget allocated a further £500 million to the Affordable Homes Programme.
However, the Government’s commitment to hire 300 new planning officers may limit growth. “A Financial Times analysis found that 3,000 planning officers had been lost from local government since 2010,” added Lucy, “This means the government will need to go further.”
Clean energy could be an opportunity
In the last two years, energy prices have been a significant contributor to UK inflation. “When inflation peaked at 11.1%, energy prices accounted for more than a third,” said Philip.
The government hopes that making Britain a clean energy superpower will improve access to cheaper net-zero electricity, as well as create jobs. It has launched Great British Energy, a company which will focus on producing low-carbon energy, while its National Wealth Fund will direct capital to infrastructure projects in related sectors. The Budget increases 2025-26 funding for the Department for Energy Security and Net Zero by 22% from 2023-2024.
“An ambitious programme of subsidies and decarbonisation initiatives were scaled back due to cost, but this is still an interesting part of what Labour is offering because it could give the UK a first-mover advantage in Europe,” said Lucy.
If there were to be significant reductions in US taxation... US bond yields would be likely to rise, feeding through to gilt and swap rates here. This could lead to higher UK mortgage rates.
Global economics could affect UK growth too
With the US election approaching, related policy changes could affect the UK economy.
“If there were to be significant reductions in US taxation, this would provide a further stimulus to the US economy leading to less Federal Reserve easing,” said Philip. “Markets could also worry more about the fiscal position in the US. The overall effect is that US bond yields would be likely to rise, feeding through to gilt and swap rates here. This would lead to higher UK mortgage rates.”
Therefore, when considering the outlook for the UK economy, domestic policies must be evaluated alongside global events.
To find out more about how Investec can help you navigate the current climate, please get in touch today.
Important information:
This article is for general information purposes only. The opinions featured are not to be considered as the opinions of Investec Bank plc and do not constitute financial or other advice. It is advisable to contact a professional adviser if you need financial advice. Your use of and reliance on any of this content is entirely at your own risk.
* Labour's priorities are outlined in its online manifesto
Browse articles in