The Chancellor of the Exchequer, Rachel Reeves, in a speech on 29th January, set out a range of “supply-side” policies aimed at kickstarting the UK’s sluggish economy, as she shows newfound optimism in its potential.
The upbeat, half-hour-long speech set out the clearest vision of Reeves’s economic approach, with her announcing the government’s backing of a third runway at Heathrow Airport, vowing to build “Europe’s Silicon Valley” in an Oxford-Cambridge growth corridor, and a new planning and infrastructure bill that will remove some of the barriers that slow down infrastructure projects.
This comes after the decline in the UK’s economic growth since the 2008 financial crisis and the UK experiencing the lowest level of investment in the G7 for 24 of the last 30 years, according to a study published by the Institute for Public Policy Research last year. The last half of 2024 was gloomy in outlook, marked by talk of “difficult decisions” on tax, spending, and welfare, and constant mention of the “£22bn black hole” in the public finances inherited from 14 years of Tory government. This has distanced investment into the UK. Mohammed Alardhi, executive chair of $53bn investment manager Investcorp, told the Financial Times that “when the government continues to talk about doom and gloom because they inherited bad things from the Conservatives, investors and business will believe you and go somewhere else”. Reeves’s relationship with businesses and investors has also been shaken by the increase in the rate of employer’s national insurance contributions in the Autumn Budget.
In an attempt to woo big investors fazed by the UK’s poor growth performance, Rachel Reeves attended the World Economic Forum in Davos, between 20th and 24th January, with a new, more positive outlook. She emphasised that growth was the Labour government’s number-one mission, aiming to ease regulatory burdens in areas such as technology, planning and financial services, and to soften non-dom tax changes.
Non-dom status allows people who live in the UK to avoid paying tax on money made abroad because their permanent home for tax purposes is outside the country. In its election manifesto, Labour pledged to scrap the status, saying that this would address unfairness in the tax system and raise extra money for public services. In Davos, Reeves said that the government will tweak the Temporary Repatriation Facility, the three-year scheme designed to help ex non-doms bring their assets to the UK at a discounted tax rate. The Prime Minister’s official spokesman said that this will “encourage non-doms to bring their funds to the UK, encouraging them to spend and invest this money here”.
The chancellor’s growth plan has attracted wide ranging criticism, even before she gave her highly anticipated speech on 29th January. Some argue that her approach is too focused on long term growth, rather than implementing measures that will have a noticeable impact in the short term on the dire fiscal situation inherited from the Conservatives. Others have argued that certain aspects of the plans are inconsistent with the UK’s net zero target. Entirely out of her hands, Donald Trump’s return to the White House, and his insistence in using international trade, specifically tariffs, as a diplomatic and political weapon, rather than for purely economic purposes, poses a risk to her plans as it has sown uncertainty in the global economy.
Additionally, while Reeves seems determined to break down the barriers on new infrastructure and housing projects, it will not be easy to navigate politically. Protests from local communities are likely to be amplified by the rightwing press. The Prime Minister’s aim to tackle the migrant crisis appears at odds with the chancellor’s growth plans as it raises the question of whether the building sector in the UK has the capacity to expand its construction workforce sufficiently to build the 1.5m homes, new stations, and other big infrastructure projects the government has set out.
Many of the proposed projects, including Heathrow’s third runway, still need to go through a formal planning process, so it could be years before building starts and the economy sees any tangible benefit. However, it laid out several specific efforts to remove barriers from existing growth mechanisms and promoted new drivers of growth. Whether the UK will break out of decades of weak productivity growth caused by underinvestment, policy uncertainty, and low business dynamism, remains to be seen. But the UK’s economic outlook does appear less bleak than many commentators feared at the time of the Autumn Budget.