Labour must tread carefully to avoid killing off Britain’s growth

Happy Friday: the economy is growing. After two consecutive months of no growth, GDP picked up in August, rising by 0.2 per cent. Production and construction output finally turned around, growing 0.5 per cent and 0.4 per cent respectively, after contracting in July by 0.7 per cent and 0.4 per cent. Services output grew by 0.1 per cent, with the biggest contributions in the three months to August coming from professional, scientific and technical activities and from information and communication sectors. 

Despite growth forecasts being revised upwards throughout the year, the news today is welcome relief for those who started to fear that growth in the UK had flatlined. Still, markets are predicting a slower growth rate in the second half of 2024. But as Capital Economics reports this morning, a ‘mild slowdown in GDP growth in the second half of this year is more likely than another recession’. That’s something, at least.

Today’s figures are mixed news for the government – especially the Treasury – that will have more fiscal headroom in the Budget depending on how optimistic the Office for Budget Responsibility is with its own forecasts for economic growth. It’s very positive that growth figures are on the up again; but if the mood music is drifting towards more stagnant times that will give the Chancellor Rachel Reeves less room to manoeuvre in her Budget, where she is already estimated by the Institute for Fiscal Studies to have to find £25billion in tax rises just to fund day-to-day spending alone.

‘Growing the economy is the number one priority of this Government so we can fix the NHS, rebuild Britain, and make working people better off,’ the Chancellor said responding to this morning’s growth update. ‘While change will not happen overnight, we are not wasting any time on delivering on the promise of change.’ Yet despite Reeves’s comments, all talk in the upcoming Budget seems to centre around plans to borrow more and tax more. This is not necessarily the recipe for whipping up spectacular growth figures.

Indeed, plenty of those details might deter investment: a challenge Reeves and Keir Starmer will face at next week’s investment summit, which Katy Balls reports is off to a shaky start. If the logistics are tricky, it’s only going to get harder facing a myriad of questions from potential investors about Labour’s plan for capital gains tax. Reeves is reported to be deliberating over this tax, looking at a range of hikes to between 33 per cent and 39 per cent. Notably, the Guardian reports that the modelling showing the highest revenue raised – an option in the middle of that range – is still only set to raise £1billion: a lot of money, but a relatively small amount in the grand scheme of total receipts. 

Will this £1billion be worth the potential damage done to relationships with the very investors Starmer and Reeves are inviting to take a punt on the UK? When the economy is growing, yes; but when it is doing so at a fairly slow pace, the stakes are far higher – especially when it comes to deterring capital investment.