Labour’s Growth Dilemma: Policies for Progress or Barriers to Business?

Illustration by Will Allen/Europinion

In the Labour Party’s manifesto entitled ‘Change’, Keir Starmer declared that kickstarting economic growth would be the first step in his plan to rebuild Britain. And yet, six months later, the Bank of England has slashed its February economic growth projections for 2025 to 0.75% - half of what the Monetary Policy Committee had predicted in November 2024. This negative development was reflected in the three-month forecasts, which have fallen into negative growth for the next quarter, sitting at -0.1% compared to the 0.3% previously estimated.

There seems, then, to be quite a gulf between the Labour government’s plan, and the reality of the situation in which the UK finds itself.

But why?

The answer lies with conflicting policies that butt heads with those that will bring growth.

Of course, the new government is planning positive changes to stimulate growth, with commitments to reform the National Planning Policy Framework (NPPF) and regulatory frameworks exemplifying this strategy. Reforms to the NPPF have been identified as fundamental to building the infrastructure needed to "power our economy". Centrally, the adjustments proposed are hoping to make infrastructure projects easier to approve, allowing businesses in the UK to build things like “laboratories, gigafactories, data centres and digital infrastructure, and the facilities needed to support the wider supply chain”. 

Regulatory framework changes will support initiatives like these, with improving infrastructure bolstered by regulatory adaptations. The manifesto promises economic regulation that “supports growth and investment, promotes competition, works for consumers, and enables innovation”, exhibited by the promises for regulations in the financial services sector that will support new technology and create a “pro-innovation framework”. This includes backing developments in Open Banking and Open Finance, which could enhance competition, improve financial accessibility and strengthen the UK’s position as a global financial hub. If implemented effectively, these reforms could encourage investment in cutting-edge financial services and fintech, helping to modernise the sector and drive economic expansion. Both of these policy initiatives show promise for growth, encouraging innovation, investment and expansion. 

However, alongside these policies, Keir Starmer’s government has put other policies in place that are bound to cause uncertainty. In particular, the new government’s employment policies put immediate cost burdens onto businesses that are already harming business confidence. 

Employment was highlighted in Labour’s growth plan as a fundamental area of improvement, key to “driving growth”, with its manifesto stating that “too many people are out of work or not earning enough”. However, the policies introduced in the October budget are not conducive to this, with employers being required to pay increased National Insurance contributions along with broader wage rises, including above inflation increases in the national minimum wage. ‘Employer National Insurance Contributions’ (ENICs) will increase to 15% on the 6th April 2025 - an increase of 1.2% - coupled with a reduction of the ‘Secondary Threshold’ at which employers start to make these contributions from £9,100 to £5,000. Accordingly, costs per employee will rise sharply, with insurance broker Lockton estimating that the average employee will cost an extra £937.80 per year. The government’s Employment Rights Bill, which was also introduced to the House in October 2024, will further add to this burden, introducing additional employment and administrative costs for businesses.

We may already be seeing the impacts of these changes. Since the Budget announcement, unemployment figures have not been promising. Forecasts from the OBR in October projected that the fourth quarter of 2024 would see unemployment at 4.3%, which would reduce through 2025 and settle at 4.0% for the third and fourth quarters. In February 2025, however, the ONS revealed unemployment in the final quarter of 2024 to be 4.4%. Whilst not concerning in itself, the Bank of England’s projection for 2025 shows a developing problem, with an expected rise in unemployment “to 4.5% in 2025 Q1 where it remains over the remainder of 2025”, thereafter rising “gradually to around 4.75%”. These are substantial changes to the previous trajectory. 

Already, major companies have announced large scale redundancies, such as Tesco and Sainsbury’s cutting 400 and 3,000 jobs respectively in January 2025, both citing market challenges. No doubt, increasing costs of employment will have been partly behind these decisions. The Sainsbury’s boss, Simon Roberts, estimated that ENICs will cost Sainsbury’s £140m in 2025, whilst reports suggest Tesco could face a bill of £1billion. 

Other businesses will certainly follow suit.

The damage to growth from increased employment costs is not the only challenge, though, with Labour’s plan, which also identifies additional private sector investment as key to supporting growth. Business confidence is critical to achieving this, with businesses needing to be assured that substantial investment in the UK will benefit them in the longer term.

The early indications on this front are disconcerting. 

In the ICAEW’s most recent ‘Business Confidence Monitor’ report, business confidence had “contracted significantly” in the final quarter of 2024, dropping from 14.4 index points to 0.2 index points, with confidence declining in all sectors. 

The tax burden on companies was identified as the main factor challenging business performance, driving scepticism. In the final quarter of 2024, 41% of businesses surveyed identified this as a rising challenge; by contrast, it was reported by less than 25% of businesses at the start of the year, and historically averages 17%. 

Consequently, Labour’s policy on growth seems to be somewhat confused. Whilst the intention to generate growth exists, exemplified by adjustments to the NPPF and regulatory frameworks, it does feel slightly misguided to set employment and private investment as key to achieving growth, and to subsequently introduce policies that increase costs for business, thus inhibiting the opportunity for them to grow.

The jury is still out on whether Labour is serious about growth.

Image: Flickr/HM Treasury (Kirsty O'Connor)

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