The UK economy faces ongoing challenges, with inflation still above target, low growth, and businesses navigating continued uncertainty. In response, Labour’s October 2024 Budget— delivered by Chancellor Rachel Reeves —unveiled a bold £40 billion tax strategy aimed at stabilising the nation’s finances. But as stagflation looms, the question remains: can Labour deliver stability without undermining growth?
Labour now faces a difficult balancing act — restoring fiscal discipline without suffocating economic resilience, all while public services are stretched and confidence in the economy remains fragile. The stakes are high, and the outcome may define Labour’s political legacy for years to come.
Labour’s £40 billion tax plan
Chancellor Rachel Reeves unveiled Labour’s fiscal strategy in October 2024, outlining a £40 billion revenue boost by 2029. Key tax changes included:
• Employer National Insurance Contributions (NICs): Rates increase by 1.2 percentage points to 15%, with the threshold lowered from £9,100 to £5,000. Larger businesses bear the brunt, contributing an estimated £25 billion annually.
• Capital Gains Tax (CGT): The lower rate jumps from 10% to 18%, while the higher rate climbs from 20% to 24%. Carried interest faces an even sharper hike to 32%.
• Inheritance Tax: Thresholds remain frozen until 2030, with reduced reliefs on agricultural and business properties, introducing a 50% charge on assets over £1 million.
• Stamp Duty Land Tax (SDLT): The surcharge on additional properties rises from 3% to 5%.
• Non-Doms: From April 2025, worldwide income is taxable.
The test ahead
In February, the Bank of England halved its growth forecast to just 0.75% and lowered interest rates to 4.5% — the lowest level in over 18 months — in a bid to support the economy. While the pace of inflation eased for the second consecutive month, falling to an annual rate of 2.6% in March from its 11% peak in 2022, concerns remain. Petrol and toy prices have declined, offering some relief to households, and food prices were unchanged during the month. However, analysts warn this could be the “calm before the storm,” with new pressures emerging. In April, UK food inflation surged to an 11-month high as the cost of essentials such as bread, meat, and fish rose, driven by increasing costs for retailers.
Labour’s tax approach may help ease inflationary pressures and reduce the deficit, but risks remain. Raising business taxes could suppress investment and deepen the downturn. Conversely, loosening fiscal constraints might stimulate growth in the short term but could exacerbate inflation.
Business reaction is another critical variable. Should companies respond with job cuts or delayed investments, the risk of recession will grow. If Labour can successfully navigate these challenges — reassuring markets, maintaining investor confidence, and protecting employment — their plan could usher in long-term stability. Until then, the UK watches closely, waiting to see whether the tax strategy can withstand the coming economic headwinds.
Winners and losers of the budget
Labour’s first budget in 14 years claims to champion fairness — but at what cost? Entrepreneurs, investors, and employers face significant burdens. Business owners now face higher Capital Gains Tax when selling, while succession planning becomes more costly due to stricter inheritance tax rules. The rise in NICs could push employers—already grappling with inflationary pressures—towards job cuts or hiring freezes. The Federation of Small Businesses has warned that without exemptions or reliefs, many smaller firms may be forced to downsize or shut down altogether. Investors, particularly in private equity and property, also take a hit. Higher duties on second homes and reduced tax reliefs are prompting some firms to reconsider their UK operations, raising fears of capital flight. Property developers caution that the new SDLT measures may deter housing development, worsening the UK’s housing crisis. The UK’s appeal as an investment hub could also suffer. With non-doms losing their tax advantages, international wealth may seek friendlier environments in Europe, threatening the UK’s competitiveness.
Despite these challenges, low and middle-income earners emerge as clear winners. Labour has frozen income tax, National Insurance, and VAT rates, offering relief to working families. Public sector workers will also benefit, with commitments to increased funding for the NHS, education, and policing. Labour has pledged to improve housing affordability, potentially easing access for renters and first-time buyers. Meanwhile, Business Asset Disposal Relief remains in place for qualifying sales, aiding entrepreneurs not looking to exit. Labour argues that removing non-dom status levels the playing field, ensuring the wealthiest contribute fairly to the UK economy. Whether this vision translates into broad-based prosperity remains to be seen.
External factors at play
Labour’s strategy doesn’t operate in a vacuum. External forces could make or break its success. International trade faces mounting pressure. Former US President Trump’s 10% base tariff on all imports, combined with rising global protectionism, has sent trade tensions soaring. Prime Minister Keir Starmer has vowed to shield British industry, but higher import costs and supply chain disruption could add further strain to an already fragile economy. With key trading partners slowing, Labour could face increasing challenges with little fiscal flexibility left to manoeuvre. China’s economic deceleration is another concern. Weaker Chinese output and lower investment are hitting global commodity markets, delaying UK infrastructure projects and pushing up the cost of critical materials. Technology supply chains are also under pressure, raising the stakes for British manufacturers. If global headwinds persist, Labour must present a coherent plan to support domestic industry while preserving the UK’s global economic standing.
Can Labour deliver stability without sacrificing growth?
Labour’s tax overhaul seeks to strike a balance, funding public services and stabilising public finances while protecting the most vulnerable. If successful, it could restore economic credibility and usher in a period of stable governance. But execution will be everything. A faltering private sector, rising unemployment, or declining investment could force Labour to reassess its course. Public sentiment may sour quickly if the costs outweigh the benefits. Ultimately, the success of Labour’s tax strategy hinges on its ability to adapt to fast-changing domestic and global conditions. If the government can thread the needle between fiscal prudence and economic growth, it could define a new era of responsible, fair governance. If not, the political and economic repercussions could reverberate for a generation.
