International Elections Series: UK — What a Prospective New Government Means for International Businesses

At a Glance

• Current opinion polls strongly suggest the Labour party will win a majority of seats in the UK’s general election on 4 July 2024, bringing an end to 14 years of Conservative party rule.
• While Labour’s plans are relatively modest from a fiscal perspective, a number of newly established statutory bodies will push its vision of government-guided industrial strategy focused on the green transition. 
• Labour’s pledge to promote economic growth and foster a pro-business environment are welcome, but it should balance interventionist instincts with the need to promote an innovative, dynamic and globally competitive environment for UK and international businesses to flourish. 

The UK will hold a general election on 4 July 2024. If, as current opinion polls strongly suggest, the opposition Labour party win a majority of seats in the UK’s lower house of parliament, it will bring an end to 14 years of Conservative party rule and result in a new centre-left government led by Labour party leader Sir Keir Starmer. 

We look at what a Labour party government may mean for businesses operating in the UK.

• Fiscal Policy and Growth Agenda: Labour have committed to adhere to the same fiscal rules as the current government: (1) to balance the current budget for day-to-day government expenditure and (2) to ensure debt is falling as a share of GDP by the fifth year of the forecast. These tight fiscal rules, if adhered to, leave very little room for manoeuvre for the UK’s public finances. Labour hopes to ease the constraints posed through economic growth and has committed to ensuring “a pro-business environment, with a competition and regulatory framework, that supports innovation, investment and high-quality jobs”. A genuine appreciation of and focus on economic growth would be welcome, but this will require prudent, long-term policy making. 
• Industrial Strategy, Investment and Infrastructure: After falling out of fashion in many advanced economies, industrial policy is back on centre stage and the UK is no exception. Labour aim to create an Industrial Strategy Council, a new statutory body which would provide strategic advice. This is alongside a new National Wealth Fund, to be capitalised with £7.3 billion over the next five years, with a remit to support wider industrial and growth strategy and clean energy commitments. Labour is surprisingly specific about the planned allocation of capital by the National Wealth Fund, with funds earmarked for automotive gigafactories, ‘clean’ steel plants, ports and supply chains, carbon capture and green hydrogen. A further new statutory body is envisioned to push key infrastructure projects and help with project planning and delivery — the National Infrastructure and Service Transformation Authority. Encouragingly, Labour appears to recognise the deficiencies of the UK’s current planning regime and aims to make the changes needed to deliver nationally significant infrastructure. 
• Business Tax: Labour has committed to not raise corporation tax beyond the current 25% for its first term. It has also promised to replace business rates in England with a ‘fairer’ system which levels the playing field between online and brick and mortar businesses. Labour has also committed to retain a permanent full expensing system for capital investment. Labour would extend the Energy Profits Levy (a windfall tax on oil and gas companies) until the end of their first term of office and increase the rate of the levy by 3%. Labour has also stated its aim to ensure that private equity ‘carried interest’ is taxed as income rather being subject to capital gains tax.
  
• Energy: Labour seeks to turn the UK into a “clean energy superpower”, with a zero-carbon electricity system by 2030. Labour would establish Great British Energy, a publicly owned body with a remit to deliver clean power by co-investing in leading technologies and help support capital-intensive projects. Great British Energy would be capitalised with £8.3 billion over Labour’s first term of office. To position the UK as the ‘green finance capital of the world’, Labour intends to mandate UK-regulated financial institutions and FTSE 100 companies develop and implement credible climate transition plans that align with the 1.5°C goal of the Paris Agreement.
• EU and Trade: While Labour has promised there will be no return to EU membership or even the single market or the customs union if it wins the election, it has committed to seek an improvement in the UK’s trade and investment relationship with the EU. It is also committed to continuing to seek foreign direct investment and targeted trade agreements. This is particularly important at a time when FDI projects in the UK have reached a more than 10-year low. Increased government certainty and more positive trade relations should help.
• Employee Rights: Labour has ambitious plans for employment rights and protections. As set out in our UK employment team’s recent alert, key pledges include a ban on zero-hour contracts, ending the practice of ‘fire and rehire’, and granting employees parental leave and sick pay as a ‘day one’ right. The most significant proposal is likely to be the promise to introduce protection from unfair dismissal as a ‘day one’ right (as opposed to the current position requiring two years’ continuous employment). In our team’s view, “this would signify a major change… The proposed change would greatly limit employers’ ability to dismiss employees during the beginning of their employment…”, although Labour has “…previously caveated this proposal by stating that it would allow employers to operate probationary periods to assess new hires”.

A Blueprint From Across the Atlantic?

Many have drawn comparisons between the Labour party’s platform and that of President Biden — a revival of government-guided industrial strategy and economic transformation centred around the green energy transition. The critical difference lies in fiscal constraints. While President Biden’s policy agenda was headlined by the Inflation Reduction Act providing hundreds of billions of dollars’ worth of investment incentives, the UK Labour party has committed to tight fiscal rules and spending plans. This reflects a realism about the UK’s financial position and the need to demonstrate to international markets fiscal responsibility. 

Opportunity and Caution 

Labour’s program represents a mixed bag for international businesses. The importance given to promoting economic growth will be hugely welcome, as will the promise to govern in a manner that allows businesses to plan for the long term. Similarly, reforming the planning system, maintaining the current level of corporation tax and making permanent full expensing are positive, business-friendly steps. On the other hand, the commitment to establish a large number of quasi-governmental bodies and to intervene in the labour market may suggest a tendency towards government overreach that threatens to restrict the potential gains of other elements of its policy agenda. Labour will need to balance the centralized government and regulatory tendencies of certain elements of its party with the need to promote an innovative, dynamic and globally competitive environment for UK and international businesses to flourish.