Potential risks to the UK economy from proposed Labour Government actions.

The new Labour Government got into power on the back of their promise to “Make Changes”. A very astute choice of Key Phrase that obviously appealed to an electorate fed up with the prevaricating and blundering of the Tories. The problem is that, now that they have started to settle in, it is still unclear as to exactly what changes are to be made. Lots of fine words but little detail!

What I find to be particular areas of concern to SMEs as far as Labour policy is concerned can be summarised as:

Tax Policies.

Labour governments tend to advocate for higher taxes on corporations and wealthier individuals.

a) The potential wealth tax increases that are being talked about could adversely affect UK investment and economic growth. There are already stories about HNWIs looking to leave the UK to avoid any such increases.
b) Businesses supported by BGF, the UK’s leading private equity investor, have expressed concerns over potential cuts to investment if Chancellor Rachel Reeves raises capital gains tax (CGT) in the upcoming Budget.
c). Though unlikely, there is a possibility that the Government could reform the current business rate system as a means of revenue generation. Not good news for SMEs and high-street retailers in particular. Let’s hope the recent calls to ‘save the High-street’ increase in intensity!

Labour regulations.

Labour traditionally has close ties with trade unions, which might influence policies that could challenge SMEs. For example:

a) Thousands of SMEs risk closure if plans to end probationary periods for employees without specific exemptions go ahead. New employment laws announced by the Government will see probationary periods scrapped, with employees granted day one rights.

The reforms will also see flexible contracts banned and workers granted a right to switch off. If/when these come into effect it is predicted that the changes will disproportionately harm small businesses. Emma Jones, founder and chief executive of small business support platform Enterprise Nation, said: “We think if new workers’ rights regulations are introduced, small businesses must be exempt from proposed fines for failure to comply with these new regulations.”
b) The UK government’s new flexible working laws were introduced by the Tories. These give employees the right to request flexible working arrangements from their first day of employment. They came into effect on April 6, 2024. What remains unclear is how ‘The right to request’ is defined. If it is left to the employer to decide if the request is reasonable, that’s one thing. If, however, that ‘right’ is determined to be ‘absolute’, then that will pose a real problem to many small businesses. Even more so if combined with the new law scrapping the ‘probationary’ employment period. Bearing in mind this is a Labour Government, it is not unreasonable to speculate that the latter will be the preferred definition.
c). Having said this there is one piece of positive news. This is the announcement of an overhaul of the apprentice system in the UK to refocus the new ‘Growth & Skills Levy’ on providing opportunities for young people.

Green Policies.

The Labour Party, like others, have green policies aimed at reducing carbon emissions. While these are important for long-term sustainability, they could pose short-term financial and operational challenges for SMEs:

Access to Finance.

Labour policies, with their traditional emphasis on supporting the NHS and placating the Unions, may influence funding and lending dynamics for SMEs.

a). The future of London’s AIM market is reported to be precarious, with many firms contemplating delisting. There are reports that there is much disappointment among senior executives. This is over the lack of engagement from institutional investors. In the first Qtr. 2024 only 4 companies registered compared with up to 16/Qtr. in 2017/18. The question is whether the new Government will be prepared to take action to preserve AIM by encouraging investors?
b). Another interesting consideration is that, whilst UK-based investors may be looking to move overseas (Point 1a above), the valuations of many UK-based businesses looks to be relatively low. This, if it proves to be the case, will likely lead to more such businesses becoming the target of overseas investment. The net result will be that, as an economy, more of our national assets are taken out of our control.
One area of major concern in this regard, based on experience, is that the ownership of more UK-developed new technology will be lost. Unfortunately, based on past experience, it is unlikely that the Government (of any colour) would put up the necessary barriers to prevent this.

Brexit-Related Challenges.

Labour’s stance on closer ties with the EU remains to be tested. Whilst in the medium term there may be benefits from such closer links, this may create considerable uncertainty for SMEs dealing with international trade in the short term.
Examples of this are:
Regulatory Alignment: If Labour tries to align more closely with the EU regulations this will put increased administrative pressures on SMEs.
Trade Agreements: This again would impose additional complexities on SMEs involved in exporting or importing.

Public Sector Contracts.

In light of the PPI scandals (actual or rumoured!) Labour may increase public spending but prioritize contracts with larger firms or cooperatives over smaller private sector SMEs. If “Size matters” when it comes to future Government contracts being awarded, then SMEs stand no chance!

Conclusions

At the end of the day the ultimate question has to be whether the new Government really understands the importance of reviving, growing and retaining ownership of UK Businesses, rather than just paying lip-service to it. Whether it be through the financial markets, services or manufacturing, the only thing that really matters is wealth generation; and by this I mean not simply for individuals but for the economy and thus the population as a whole!

My fear is that the new Government may not truly have this as THE major priority.

As an example of what I mean; The FSB had representatives at the September Labour Party Conference. They held ‘The Small Business Forum’ in conjunction with Labour Business and Visa UK. They were joined at this event by Secretary of State for Business and Trade Jonathan Reynolds. He discussed ‘how Labour will work with FSB’ to legislate against late payments. An important subject for many SMEs, but only one of many priority matters for FSB members as detailed above. He does not appear to have discussed any of the others with the FSB at the Forum. This again demonstrates that the Government have yet again failed to have a detailed plan of action ready to implement!

To put a ‘neutral’ slant on this Blog I would point out that the other problem. This is that the new ‘Opposition’ are not only currently headless but also appear to be generally clueless!. Even with any positive ideas on re-invigorating our economy, it’s likely to be years before they can put them into action! Heaven knows where we will be by then!!?

Put in simple terms “As with any family or business, we need to earn more than we spend if our economy is to continue to grow”. If this is not understood growth will not happen and funds will not be available do things like getting the NHS back on its feet.

October 2024