GK’s ‘Westminster in 2025’ report sets out the key political themes from 2024 and what we can expect to see over the coming year. Please click here to download the report.
The Economy, Tax & Spend
The Rt Hon David Laws, GK Strategic Adviser and former Treasury and Education Minister
The most important of the ’missions’ of the new UK government is to boost the country’s economic growth rate. In opposition, Keir Starmer and his team gave the impression that higher growth would be the silver bullet that fixed many of the nation’s problems – allowing him to boost spending on public services without raising taxes. Alas, we are now six months on from the easy promises of election manifestos and deep into the harsh reality of the difficult choices that governments routinely need to make.
Labour spent its first four months in office spreading gloom about the UK’s fiscal position – most of which was obvious well in advance of the election. The October 2024 Budget then included a large increase in payroll costs on employers – a big hike in the minimum wage, combined with a large increase in employer national insurance contributions (NICs). Oddly, the latter was accompanied by a lower starting threshold for paying those employer NICs – a great way of making lower paid employees more expensive to hire. The big rise in payroll costs has been a blow to many employers, and the response will be seen over the months ahead. This could include fewer jobs, price pressures as employers seek to protect their profits, and a squeeze on pay. All this has contributed to higher inflationary expectations – making the Bank of England more cautious about cutting interest rates.
The economy flatlined in the closing months of 2024, and all this is before the employer NICs rise takes effect in April 2025. It is hardly the start to the “growth mission” that Starmer and his Chancellor hoped for.
Nor is the international picture helpful. The German economy is also flat on its back and the election of Donald Trump has raised the risk of tariffs, which could damage growth, increase uncertainty, and cause the Federal Reserve to be more cautious about cutting US interest rates – a major driver of global growth and global markets.
In the first six months of 2025, Rachel Reeves must deliver two major and potentially tricky fiscal events. The first is an economic statement on 26th March and the second is Phase 2 of the Spending Review, which will set departmental spending plans from 2026 onwards.
The Spring Economic Statement is not planned to be a major economic and fiscal event, but the Chancellor will be under pressure if growth remains lacklustre and if it looks as if her fiscal targets are in danger of being missed. Starmer and Reeves have given a strong public steer that they do not plan to come back with another large tax hike on business during this parliament, and indeed they have given the dangerous impression that no further major hikes in taxes can be expected. If they are forced to reverse course on these pledges, the political cost could be very high indeed.
Then, the government will announce the results of its Spending Review Phase 2, likely in June. From 2023-24 to 2025-26 real departmental spending is due to rise by a healthy 4.3% per year. But the spending plans announced in October’s Budget allow for barely 1.5% real growth in spending from 2026 onwards. How this will be reconciled with likely commitments on the NHS, social care, education, defence, housing and many other areas of public spending is anyone’s guess. Either a nasty surprise faces many spending departments, or the Chancellor will need to find more money.
All this emphasises just how important growth is. Reeves’ first Budget forecast a rise in growth from 1.1% in 2024 to 2.0% in 2025. The latter currently looks ambitious, although a surge in public spending and investment will be one source of support. Beyond next year, the economy cannot rely on public spending to drive growth. Instead, the government needs to do the hard work on trade policy, productivity and skills, planning reform, and housing and infrastructure investment to really drive the growth mission. These are easy things to talk about but require skill and political determination to achieve. 2025 will be a testing year for the UK’s new government. How it tackles these challenges will be of crucial importance to its electoral prospects and to the future of the country.
Business & Investor Sentiment
Lizzie Wills, Senior Partner & Head of Private Equity, with reflections from GK Chairman, Tim Farazmand
2024 will not be remembered as a vintage year for investors in the UK. With a sluggish economy, stubbornly high interest rates and the uncertainty brought about by a general election, it was unsurprising that deal flow and completion numbers felt at times underwhelming.
The Autumn Budget was front and centre in the minds of investors, with the long-trailed changes to Capital Gains Tax and Carried Interest finally being confirmed. The Chancellor announced that tax on Carried Interest would rise from 28% to 32% from April 2025, a short-term reprieve from a reclassification as Income Tax from 2026. Concerns have been raised about the longer-term implications of this move on the UK’s competitiveness and ability to attract talent.
Announcements at the Budget about increases to employer NICs, a reduction in the secondary threshold and increases to the National Living Wage (NLW) and National Minimum Wage (NMW) are also impacting investment decisions. Sectors that have traditionally relied on private capital, including hospitality and social care, are looking like riskier propositions. Owners of existing assets now face difficult choices about either passing on costs to customers or revisiting growth plans that involved spend on plant, people or infrastructure
On the upside, investors are sitting on close to record levels of dry powder, with capital deployment likely to accelerate if market conditions become more favourable over the course of 2025.
With an ambitious Labour government in place, there will inevitably be risks to navigate as policy interventions are made. But there will be plenty of opportunities for sponsors willing to get into the weeds of policymaking. The new National Wealth Fund is a case in point, with the government keen to crowd in ‘catalytic capital’ to finance a step- change in the UK’s energy transition.
GK’s Chairman Tim Farazmand added: ‘Whilst the first few months of Labour’s administration have been criticised for not delivering against the party’s early promise, one thing is clear: this is a government in listening mode. Businesses are reporting an open door and willingness on the government’s part to engage across Westminster and Whitehall. This presents a fresh opportunity for agile businesses to input into policymaking processes and help frame reform agendas in a way that is effective for government and workable for business.’
Other risks and opportunities will arise because of political shifts further afield. Donald Trump’s trade policies, and rising levels of global instability, will heavily influence global investment strategies in 2025. Strategic considerations will weigh heavily on investors’ minds, not just economic ones.
Trump’s promise of tariffs on all goods entering the US will shape dynamics in the global economy, with supply chains disrupted and retaliatory measures from other countries a likely response. In the US, long-term inflationary pressures are likely to be the price paid for Trump’s resolutely deregulatory agenda. In the UK, we are likely to see the Labour government strengthen its economic and diplomatic relationship with its biggest trading partner – the European Union – to insulate itself from shocks.