How Labour can revive UK animal spirits

Welcome back. Next week marks the first anniversary of the UK Labour party’s return to power after 14 years in opposition. Economic growth is the government’s “number one mission”, according to Prime Minister Sir Keir Starmer.

This week I assess Labour’s progress on that mission, outline what it should do next and, with the help of prominent thinkers on the UK economy, offer five policy recommendations.

Since Labour came to power in July 2024, the UK economy has grown by 0.89 per cent up to April this year. There are more than a quarter of a million fewer payrolled employees, according to May 2025 data from HMRC. Economic activity across all major sectors has fallen, and business and consumer confidence have flatlined.

Britain has been buffeted by global economic uncertainty. Still, the numbers so far reflect poorly against the government’s mission.

Part of this comes down to Labour’s growth strategy. “Its focus has been investment,” says Giles Wilkes, a senior fellow at the Institute for Government. “This has meant putting funds towards public services, infrastructure and defence.”

As I outlined in the June 1 edition of this newsletter, under-investment is central to Britain’s subdued productivity growth. Assuming the funds allocated by chancellor Rachel Reeves are spent well, the growth rate should rise over the long term. But the government has done little to boost economic activity in the near term.

In its first Budget in October 2024, Labour raised day-to-day spending for Britain’s strained public services. After promising not to increase taxes on “working people”, it chose to cover its spending shortfall by raising levies on employers, investment and the wealthy. Reeves also left a small buffer against her main fiscal rule to balance the current budget.

This left the government reliant on growth to drive up revenues and sustain fiscal headroom. But with higher taxes straining economic activity in the near term, and the bulk of Labour’s growth agenda focused towards the long term, that strategy has been exposed.

Reeves’ buffer has come under pressure. And as recent U-turns on planned cuts to winter fuel payments and welfare show, the party is struggling to make savings. This maintains the spectre of higher taxes, which crimps businesses and investment even more.

Unless economic activity picks up soon, Britain risks falling ever deeper into a spiral of rising taxes and lower growth.

“The key now is clear and consistent signalling to companies, the market and investors that the environment in the near future will be even more predictable and business friendly,” said William Wright, managing director of the New Financial think-tank.

Essentially, Labour needs to revive animal spirits quickly, cheaply and without irking more voters. How? I asked UK policy experts. Here’s what they said:

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Turbocharge planning reforms

The government has made efforts to streamline the planning system, but Sam Dumitriu, head of policy at Britain Remade, says it can be more ambitious and targeted.

He urges the government to emulate New Zealand and “automatically grant planning permission for new six- to eight-storey housing in expensive cities near good public transport infrastructure”. 

Likewise, Ben Hopkinson, head of housing and infrastructure at the Centre for Policy Studies, adds that the UK should return to explicitly linking housing and infrastructure projects. From the 1880s to 1933, the Metropolitan Railway would buy land near proposed train routes, extend the railway and then sell the higher-value land for development.

“Today major infrastructure projects can only jointly consent up to 500 homes, a limit so low this ability is almost never used,” says Hopkinson. “The housing secretary could scrap this limit tomorrow. That would enable new homes to be built alongside new supporting infrastructure.”

Reduce or abolish stamp duty on shares

Stamp Duty Reserve Tax is levied on the purchase of UK-listed company shares at 0.5 per cent. No country with a major financial centre charges transactions as high as Britain does, if at all.

A 2024 study by Oxera found that the tax reduced total pension savings at retirement, raised the cost of equity and limited capital expenditure.

It reckons abolishing SDRT could raise GDP permanently by between 0.2 and 0.7 per cent. For measure, this could raise the annual tax take by up to £6.8bn. SDRT currently brings in £3.8bn in receipts.

Introduce an ‘innovation visa’

The UK has one of the most expensive and burdensome visa systems for talented, high-skilled individuals across advanced economies.

Anna McShane, founder of the New Britain Project think-tank, recommends introducing a special invitation-only visa model, based on Australia’s National Innovation Visa.

Even if only for a limited period, it would offer a low-cost, fast-track route for talented individuals to permanently work, conduct research or start a business in priority UK sectors. As regional hubs for innovation, Britain’s world-class universities and research institutions could help administer them.

Tim Leunig, chief economist at Nesta, concurs, and adds that giving research-intensive universities the ability to issue visas would encourage them to scout for talent globally. 

Fix cliff-edges in the income tax system

Kinks in Britain’s income tax system result in punitive marginal tax rates. Two are particularly problematic.

First, the loss of tax-free childcare support if one parent’s adjusted net income exceeds £100,000 per annum. (My colleagues Claer Barrett and Emma Agyemang wrote about this in March.) Second, the 60 per cent marginal tax rate for those earning between £100,000 and £125,000, as the personal allowance is tapered.

“These high marginal rates encourage workers to limit their earnings by reducing their hours or by making outsized pension contributions,” notes Dan Neidle, a UK tax expert.

The government could scrap the limit on childcare support by making it universal. This would probably cost in the low hundreds of millions, according to Institute for Fiscal Studies estimates.

The government could commit to fixing other cliff-edges as part of a longer-term signal to workers. “The personal allowance could be tapered over a longer stretch of income, likely at little cost to the exchequer,” says Neidle, regarding the high marginal tax rate above £100,000.

Reform the Individual Savings Accounts system

The combined assets of Britain’s Isa system — a form of tax-free saving on up to £20,000 per person per annum — are worth around £775bn, more than the total value of defined contribution pension assets, according to New Financial.

It recommends simplifying the system — which includes cash and equity investment products — into a single wrapper rebranded as an “investment and savings account”. New Financial reckons this alone could encourage an additional £5.4bn to be invested in stocks-and-shares Isas each year, helping to boost Britain’s retail investor market and liquidity.

Over time the government could explore splitting the annual allowance evenly, with any cash Isa savings above £10,000 only eligible for tax breaks if invested. For measure, New Financial finds that 80 per cent of cash Isa users save less than that amount each year anyway.

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These reforms aren’t perfect, but given Labour’s constraints, they are pragmatic ways to spark business and investor confidence. Send your policy recommendations to [email protected] or on X @tejparikh90.

For a party with one of the largest majorities in UK history, there was a unique opportunity to embark on major reforms and cost-cutting.

After all, big tax measures would go further to boost growth and significant spending cuts would ward off the ongoing threat of higher taxes. I will return to these in a future newsletter.

Instead, Labour’s first year will go down as a major missed opportunity for the UK economy. It has lacked boldness, and with its lack of business experience, the UK cabinet has overlooked the vital role of keeping the private sector onside.

The funk around Britain has locked the country into weak economic activity, politically strenuous cost-cutting and higher taxes. To escape its own trap, Labour must find a way to boost animal spirits.

Food for thought

Ambiguity is bad for the economy. This paper quantifies how poorly written legislation harms investment, raises costs and slows growth.

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Free Lunch on Sunday is edited by Harvey Nriapia