What Keir Starmer’s New Labour Government means for UK businesses

Today sees Keir Starmer become the 59th Prime Minister of the United Kingdom and the third during the reign of King Charles III. He led the new Labour government to an overwhelming majority late last night and today marks the first day of his time in office. Leading into the election, Retail Investor Beat and eToro found that 44% predicted that a change in government would positively impact the FTSE and other UK stock markets. At the beginning of the week, another study found that business leaders state a preference towards Labour politicians over the now dwindling/opposition party, the Conservatives. With one of Labour’s key tentpoles in their manifesto being to ‘deliver economic stability’, it was a clear sign to the business community and the general public that they wanted to combat claims that his party was ‘anti-business’. We’ve summarised talking points from their manifesto and speeches to predict what a Labour government might mean for UK businesses, both large and small, and the economy in general.

The economy

A heavy focus in the manifest was to stress that day-to-day costs would be met by revenues to deliver a budget that balances. Obviously, at this point it’s something impossible to judge but the Labour party have stressed that sustainable growth is achievable when a government acts as a strategic partner to its business community. Using the term ‘securonomics’ (an approach that understands sustainable growth needs to be underpinned by a board base and resilient foundations. The aim for Labour is to provide a more active and smarter government that collaborates with business, trade unions, local leaders and devolved local councils. It will look to these bodies to be involved in growth plans as they see it as important to building a stronger economy in all parts of the country. Supporting these efforts will be strategic use of public investment to unlock additional investment in the private sector, create jobs and provide an ROI for the taxpayer. To staunch the proportion of debt carried by the United Kingdom, expect labour to grant additional powers to the Office for Budget Responsibility (OBR) and appointing a fixed-term Covid Corruption Commissioner to recoup as much public money lost through pandemic-related fraud and unfulfilled contracts from that period. It’s worth noting that Rachel Reeves, the now Chancellor of the Exchequer to replace Jeremy Hunt, pitched her case for a Labour government by saying “Without better economic growth, a Labour Government would have to make “impossible” tax and spending decisions.

Tax

A major highlight was put on the statement that the new government won’t be raising income tax, national insurance or VAT. This might cause an issue to raising spending significantly due to the ‘parlous state’ of the country’s finances. They are hesitant to change the business tax regime pointing out that under the last government’s rue, Corporation tax changed 26 times and major fiscal events have often happened with little notice. They’ve committed to one ‘major fiscal event’ a year, giving businesses due warning of tax and spending policies. Alongside, a business taxation roadmap will be published to allow businesses to invest with confidence. Another olive branch to the business community comes with a commitment to cap Corporation Tax at 25 pence in the pound, the lowest in the G7, for their entire parliament. This is seen as necessary to retain competitiveness in the UK markets compared to alternatives both within mainland Europe and across the Atlantic. The retention of a permanent full expensing system for capital investment and the annual investment allowance for small business combined with greater transparency on what allowances qualify look to improve and inform better business investment decisions. They’ll also seek to replace the business rates system to provide a level playing field between brick-and-mortar stores and online giants and encourage entrepreneurship. Expect to see a revamped HRMC with increased registration and reporting requirements, increased powers that will look to increase the public coffers with a renewed focus on tax avoidance. This will go hand-in-hand with a ‘windfall’ tax on oil and gas giants that looks to raise £1.2bn a year to further increase the headroom the Labour government will have in any future budget. They did, however, exclude the possibility of including banks within this windfall or introducing a financial transaction tax.

Industrial strategy

The government are keen to be mission-driven and future-focused. Working with industries to maximise opportunities and conversions whilst removing growth barriers. To move away from short-term economic policy and replace it with an Industrial Strategy Council to provide expert advice. Comprised of businesses and trade unions, its purpose is to drive economic growth throughout the nation. Their approach will be sectoral and focused on areas where the UK has advantages over other nations. They have earmarked research institutions, professional services, advanced manufacturing, and creative industries. They hope this will foster a ‘pro-business environment’ with a competition and regulatory framework pivoting on innovation, investment and high-quality job creation.

The Competitions and Markets Authority

It’s expected that the Labour government will grant new powers of intervention to the body to protect competition and reign in the largest digital players to adhere to new conduct rules.

The Financial Services sector

In their manifesto and throughout their election campaign, Labour have pointed to the City as one of Britan’s “greatest assets” and a key to igniting growth within the economy. This is of course linked to the knowledge that with the UK’s strapped finances, the government will rely heavily on private sector funds to meet their infrastructure promises and growth-related investments. They will aim to scale regional financial centres to join the established hubs in London and Edinburgh as well as “unlocking the full potential” of the mutuals sector. Twinned with their pledge to exclude banks from a ‘windfall tax’ on profits is a promise to not row back the Conservative party’s decision to scrap a proposed cap on bankers’ bonuses. To boost the sector, the Labour government want to embrace innovation and fintech as the future of financial services and become a leader in Artificial Intelligence within the space. They hope this will lead to Open Banking and thus Open Finance that establishes a “regulatory sandbox for financial products to reach underserved communities”. Regulations within the industry will receive “a more joined-up and innovation-centred approach” to regulation and supervision that aspires to streamline the regulatory rulebook, strengthen international engagement within the sector, and enhance relationships with the EU. Ultimately, the target is to lead the world in sustainable finance and make the country a “global hub” for green finance activity and regulatory frameworks to decarbonise the United Kingdom.

Financial crime

In a speech made by David Lammy in May, he made it clear that the new government intends to incentivise whistleblowers with a quarter of any fines handed down by the Office of Financial Sanction Implementation going to those who highlight the improprieties. This dovetails with statements made by the Serious Fraud Office (SFO) that indicated their support if these rewards were introduced. Whilst there is little doubt that these sums would reach those seen in the United States, it does severely increase the likelihood of a higher number of whistleblowing cases within the UK In the same speech, Lammy also intimated that Labour would seek to widen requirements for the registration of UK trusts not just on the mainland but in crown dependencies and overseas territories to further restrict the use of corporate vehicles for illicit funds.

Investments and savings

It’s predicted that Labour will divert more pension fund money into high-performing British assets although it is unclear if they will kowtow to calls for mandatory UK allocations in doing so. Likewise, there hasn’t been much mention of the ‘British ISA’ the departing Chancellor announced back in the Spring but the feeling is very much that Labour won’t want to dismantle too much of the existing regime too quickly. Stimulating capital markets by reviewing the pensions and retirements landscape could mean greater consolidation of all schemes. This would mean there was more growth capital to boost British businesses.

Increasing investment

A National Wealth Fund is expected to come to fruition having been announced within their manifesto. This would seek to invest:

• £1.8bn to upgrade ports and enhance and create supply chains
• £1.5bn for gigafactories in the automotive sector
• £2.5bn to rebuild the steel industry
• £1bn towards deploying carbon capture
• £500m supporting the creation and manufacture of green hydrogen.

Infrastructure and technology

We expect, if the government performs to its manifesto, to see a ten-year infrastructure strategy to improve rail connectivity across the North of England. The purpose of the plan is to give the private sector certainty about the project pipeline. Labour have also signposted a renewed push to reach the ambition of full gigabit and 5G coverage across the UK by 2030.

Innovation

Keeping with the motif above, Labour have outlined plans to remove short funding cycles for key R & D institutions and will replace them with ten-year budgets to ‘allow meaningful partnerships with industry to keep the UK at the forefront of global innovation.’ Starmer’s party is also putting AI at the forefront as they ensure their industrial strategy supports development within this sphere. To continue the focus on growth, the government will work with industries to ensure start-ups have access to growth-boosting finance. Twinned with this will be support for diverse business models to bring innovation and new products to market and a goal to double the co-operative and mutuals sector.

The small business sector

Although the above focuses will benefit small businesses, perhaps the biggest nod to protecting this part of the economy came with the manifesto alluding to the Prompt Payment Code, introduced by the Labour Government led by Gordon Brown in 2008. The Labour government have promised to take action on late payments to ensure small businesses and the self-employed are paid on time and in full. Improved guidance and the removal of export barriers for small businesses are also slated to come into effect. They also look to reform the British Business Bank to include a stronger mandate that supports growth and makes it easier for the SME market to access capital. Labour have also alluded to reforming procurement rules to allow better access for smaller businesses to tender for government contracts.

The wider world

With the Labour government seeking to increase the attractiveness of the UK market to businesses, it will have one eye on the imminent elections in France. Stock and bond markets tumbled after Macron declared a snap election with investor fears about a victory for Rassemblement National (RN) or a gridlock being the driver for the drop. The first-round election saw the RN lead the polls and while their economic program has been aligned with corporate France with potential Prime Minister, Jordan Bardella, issuing a pledge to “unwind the breaks that hold back economic growth” – it remains to be seen if their election would cause more companies to look over the Channel and a potential listing in London as they face the threat of tighter financial conditions in Paris.

Nick Chinn, Chief Executive Officer, Cytec Solutions says:

“We have, thankfully, reached the end of what feels like a very long election campaign, and are perhaps now on the verge of obtaining some clarity about the future direction of government policy. Undeniably, the new administration has a raft of challenges to deal with, and it remains to be seen how they balance the competing priorities. The government has identified economic growth as pivotal to our national success, and it can be hoped that their policies will promote investment and increases in productivity, whilst maintaining effective regulation and corporate governance, and will (over time) staunch the outflow of UK listed companies to overseas capital markets. At Cytec, we are incredibly optimistic about the future, for ourselves, our industry sector, and the country as a whole. As we approach our 25th anniversary, we are looking forward to working with our clients and partners and seeing what the future brings.”