Potential Impact on UK Businesses and Economy: What to Expect Post-Election

With Labour cruising to a win in the general election on July 4, what does a return to Labour mean for the businesses, trade and the economy?

After 14 years of Conservative rule, spanning Brexit the Covid-19 pandemic and a cost-of-living crisis, the UK has had a change of government. Under its current leader Sir Keir Starmer, the Labour party has been at pains to show that it has changed. But despite a more business-friendly and fiscally responsible stance, there remains uncertainty around what exactly a Labour government might do now in power.

As with previous general elections, the economy was centre stage. In the first quarter of 2024 the UK economy returned to positive growth after eight quarters of stagnation. Our forecast puts the UK economy on track to grow by +1.9% next year, up from 1.3% this year and just +0.1% in 2023, a brighter outlook Germany, France and Italy.

Forward looking indicators such as the UK Purchasing Managers’ Index (PMI) and consumer confidence data are improving, and supply side pressures, including energy costs, are dissipating. Inflation is falling (the Consumer Prices Index (CPI) rose by +2.0% in May 2024, well below its peak of +11.1% in October 2022, and lower than in the eurozone and the US) and talk is now of when, rather than if, the Bank of England will cut interest rates. We expect the base rate to fall back to 3.5% by the end-2025.

An electoral upset couldn’t be ruled out. But with Labour winning the election on 4 July, we expect (80% probability) a Starmer-led government to be fiscally pragmatic. Labour’s spending plans – which include raising green investments by around £5bn, £1.8bn upgrading port infrastructure, £1.3bn per year on a home-insulation scheme, and £4bn to support building 1.5m new houses over the next five years - would likely result in a £20bn increase in tax receipts. Based on past Labour policy, this could see additional tax measures for private equity firms, big energy firms, and big tech, in addition to an expected crackdown on tax evasion.

However, a more ambitious Labour government (20% probability) could see tax receipts hit £73bn and lead to a fiscal shortfall of around 1% of GDP in 2025 and 2026 and a total of 3% of GDP by 2028. A more determined Labour government could, for example, increase the National Insurance rate to 12% from 8%, raising tax receipts by £20bn, or increase the corporate tax rate from the current 25% to the 30% in place before 2008. They could also raise its green investment plan to the initial £28bn, and double its NHS spending plan to £2.2bn.

In an “ambitious” scenario, UK growth would fall-back to +0.7% in 2026, less than half compared to the baseline scenario, induced by a higher tax burden. Inflation would stay above 3% as sterling would depreciate by -7% to -10% and wage growth would be higher due to reduced labour market flexibility and immigration policies.

Migration was another key election battle ground. Net migration reached 672,000 in 2023, up from an average 250,000 before Covid-19, driven mainly by the influx of foreign students and care workers from non-EU countries. Under pressure to curb migration, the Conservatives have pledged to cap numbers at 300,000 per year, while Labour plans to boost skills in the UK to reduce reliance on foreign labour in sectors like construction, IT, social care, health and engineering. Labour’s pledge alone would reduce growth by -0.5pp by 2029 and would exacerbate labour shortages, notably in health and social care.

Such promises are not new: the Conservative-led UK government from 2010 to 2019 targeted net migration at under 100,000 per year, without success: The target was abandoned at the end of 2019 and a points-based-immigration system was introduced in 2021. However, without a positive migration balance, the UK’s working age population would shrink by 10% to 34.9mn in 2050. In fact, immigrants play an increasing role in the UK labour market. Between 2013 and 2023, the share of immigrants born outside the UK in all employed persons aged 16 and older increased from around 15% to 21%.

Eight years on from the Brexit referendum, and Labour promises to improve EU trade ties by aligning the UK more closely with Brussels regulations, seeking a better deal for services and cutting red tape on food exports. We estimate that border controls are costing £2bn to British importers, equivalent to an upside impact on inflation by +0.15pp. At the same time, the UK decided on a massive two-year tariff suspension on almost half of its imports. This smart counterattack could cut total import costs by £7bn, and subsequently decrease inflation by -0.6pp.

However, the move could be questioned by the next Labour government. In terms of international trade, Labour wants to pursue fewer Free Trade Agreements while easing the burden of trade with the EU. Around 40% of UK trade is not under FTAs. Should tariffs be reduced to below 1% on the share of imports that are trading under the WTO rules, this would reduce import costs by £7.8bn, potentially boosting private consumption by +1.0pp. On the export side, signing the remaining FTAs could mean a boost of £6bn.

2024 is the year of elections. Several, not least the US presidential election in November and the France’s parliamentary election in June and July, have outcomes that are difficult to predict, and may lead to more extreme outcomes and policies. Despite geopolitical tensions abroad, UK exporters anticipate growth in 2024, according to the latest Allianz Trade Global Survey 2024. Some 87% exporters expect at least +2% growth in exports while 84% predict export prices will grow by as much as +10% in 2024. Yet, while exporters foresee revenue growth this year, it will not come without its challenges.

UK exporters cite the general election as the main geopolitical factor posing an immediate risk to their supply chains, according to the Allianz Trade Global Survey 2024. Political risk was cited as the top threat to export activity (at 74%), followed by shortages of inputs and labour (49%) and financing and non-payment risk (39%).

Changes in government in the UK are relatively infrequent. There have only been three changes in the ruling party in the UK since 1976. Despite limited fiscal room to manoeuvre, Labour’s win will have important consequences for UK businesses, shaping future economic growth, employment law and migration, trade and the UK’s relationship with the EU, as well as infrastructure investment and the green transition, house building and planning reform.