Britain’s economy is remarkably resilient. It has suffered a series of hammer blows since Labour assumed office last July.
The purported discovery of a £22billion legacy black hole in national accounts was an early warning of tax increases and savage cuts to come. Fears of levies on wealth saw the first wave of millionaires heading for the ports.
This was followed by the hammering of the labour market in the £40billion tax-raising Budget in October with higher employers’ National Insurance contributions a hit to jobs, business and consumer confidence.
As critically, the Budget included a much-trumpeted change in the fiscal rules which naively left Chancellor Rachel Reeves with no room for manoeuvre.
As output sagged in the second half of 2024 and bond rates reached worrying levels, driven higher by concerns about Britain’s borrowing and debt burdens, Reeves found herself on a treadmill, requiring ever more spending cuts or tax rises simply to keep on track.
The Government left itself very little fiscal space for the change in strategic thinking as the US backed away from commitments to Europe’s defence. There was scarcely room for the unexpected such as the expensive bailout of Scunthorpe’s Chinese-owned blast furnaces.
Relief: Chancellor Rachel Reeves has been buoyed by Britain’s rip-roaring service sector which has helped drive expansion in the first quarter
A Government which declined to spend £20million to support an AstraZeneca vaccine facility on the Wirral – supporting one of the UK’s fastest-growing sectors – dug deep to find at least £600million to bail out steel making.
Despite all this, Britain’s rip-roaring service sector helped drive expansion in the first quarter. The 0.7 per cent surge in output means that, for a short period at least, the UK was almost certainly the star performer among the Group of Seven richest nations (final figures for Japan are not in).
Much of the uncertainty since March is the result of Donald Trump’s tariffs. Sir Keir Starmer can thank his lucky stars that the Trump White House is obsessed with goods, trade where Britain is broadly in balance with the US, and not services, which continue to boom.
In March services contributed 0.4 per cent to output. In contrast, industrial production fell by 0.7 per cent.
If the currently marooned car, steel and aluminium manufacturers finally get some clarity of when Trump’s punitive, reciprocal tariffs come off, there is the possibility of a manufacturing recovery.
Meanwhile, Labour’s upbeat rhetoric on housing and construction, with the pledge to sweep planning controls into the sea, has produced a minimal response so far.
Skills blockages, materials shortages and the nation’s old friend ‘nimbyism’ keep the brakes on.
Most of the commercial surveys, in which economy-watchers place store, have suggested that successive Labour blows to confidence, such as the NI contributions increase and net zero zealotry, would bring investment to a shuddering halt.
Remarkably, business investment has been steaming away, driven by transport (mainly aircraft), machinery and plant.
Unless the data turns out to be a freak, there is a tax lesson in this. A Labour inheritance from Jeremy Hunt and the Tories was a ‘full expensing’ scheme which allows corporations to offset spending on plant and equipment against headline tax.
Big decisions on new capital take time to come to fruition. This ought to be a reminder to the Chancellor and the new Second Permanent Secretary of the Treasury, Bank of America emigre Jim O’Neil, (not to be confused with Lord Jim O’Neill, chairman of the Northern Powerhouse) of the power of tax breaks.
Think what might happen were Reeves to use her June public spending review, or her October Budget, to extend full expensing to the digital economy of software, coding, AI, intellectual property and the digital economy.
More houses is a fine goal, but the supercharged growth of Silicon Valley, Israel’s start-up economy and Britain’s Cambridge-Oxford innovation hubs has been built on mind power, computing and IT.
Extending full expensing to the cyber economy could prove a bigger draw for Big Tech to the UK, and an incentive to keep British tech here as opposed to superficial gestures, such as a commitment to allow self-regulation of freedom of content.
There is an opportunity for fresh supply-side thinking around the Cabinet table. Grab it!
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