Entry 11: A Budget Window for Growth: Rethinking the UK’s Economic Playbook

The latest figures from the Office for National Statistics (ONS) confirm what many feared: the UK economy is stagnating. July delivered zero growth—a sobering reversal from June’s modest 0.4% expansion. A slump in manufacturing offset gains in services and construction, while GDP growth over the three months to July slowed to 0.2%, down from 0.3% in the previous quarter.

With the November Budget fast approaching, the government faces a narrow window to regain control of the economic narrative—and to set a credible direction for growth. So far, ministers have defaulted to blaming their predecessors and the opposition. That tactic has worn thin. Without a clear and compelling plan, political paralysis is not just possible—it’s inevitable.

Chancellor Rachel Reeves has rightly made economic growth her top priority. Prime Minister Sir Keir Starmer has convened a “Budget board” to coordinate the government’s fiscal response. But coordination alone won’t suffice. The UK needs more than reactive fiscal management. It needs a proactive strategy—one that balances tax reform with targeted investment and places regional development at the heart of its economic recovery.

Debt Trap

The fiscal gap is real. Among the G7 nations, the UK ranks fifth in government debt as a percentage of GDP, with a ratio of around 104%. It trails behind Japan, Italy, the US, and France, but has higher debt than Canada and Germany. Germany holds the lowest debt-to-GDP ratio, while Japan’s is the highest by a wide margin.

The Tax Trap

Economists estimate that Reeves may need to raise over £20 billion in taxes to stabilise public finances. Yet the political appetite for tax hikes is thin. The Bank of England is expected to hold interest rates at 4%, even as inflation remains stubbornly high at 3.8%. The pound fell 0.2% against the dollar following the GDP release—a signal of market unease.

Barclays Raises Concerns

Meanwhile, corporate leaders are sounding alarms. Barclays CEO C.S. Venkatakrishnan recently urged the Chancellor to avoid raising taxes on banks, warning that UK banks already face an effective tax rate of 46%—far higher than their counterparts in New York (28%) or across the EU (29–39%).

Barclays alone paid £1.4 billion in UK taxes last year, including £198 million in corporation tax and £154 million for the bank levy. The message is clear: the government must lead the conversation on tax, not follow it.

A Place-Based Strategy

To break the cycle of stagnation, the UK needs a new economic playbook—one rooted in place-based impact investing. This approach aligns public policy with private capital to stimulate growth in specific regions and sectors. It’s not just about spending; it’s about strategic deployment.

Invest in SMEs for Growth

Startups and SMEs, particularly in the Southwest, Wales, and other underserved regions, should be at the heart of this strategy. Tax deferrals for these businesses—through schemes like the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS)—can unlock innovation and job creation.

Though the Social Investment Tax Relief (SITR) was discontinued in 2023, its principles remain relevant: incentivise investment in enterprises that deliver social value.

Social Bonds: A Missed Opportunity

The UK pioneered Social Impact Bonds (SIBs) in 2010, but the market has since faltered. Issuance volumes have plateaued globally since 2021, and the UK reflects this trend. Government-led initiatives like the Life Chances Fund and Social Outcomes Partnerships have struggled to scale due to fragmented governance and limited corporate engagement.

The barriers are well-documented:

• Over 60% of euro-denominated social bonds are issued by just three entities, with minimal UK corporate participation.

• Only 18% of global social bond issuance comes from corporates, despite the relevance of sectors like healthcare, education, and housing.

• Measurement challenges persist, with no standardised metrics to quantify social impact.

• A 2023 Goldman Sachs survey found strong investor interest but a shortage of investable products and concerns about diversification.

Yet the opportunities are equally compelling:

• 65% of surveyed investment professionals already allocate or plan to allocate to social bonds.

• The UK retains policy infrastructure—like the Life Chances Fund—that could be reactivated or reformed.

• Boutique ESG law firms and advisory platforms are well-positioned to help corporates navigate issuance.

• Untapped industries could unlock billions in social finance if properly incentivised.

Capital Deployment with Purpose

Beyond tax and bonds, the government must focus on capital investment in regional economies. This includes leveraging Local Enterprise Partnerships (LEPs), the UK Infrastructure Bank, and impact funds targeting underserved areas. The goal is not just to spend, but to invest with intent—creating ecosystems where innovation, employment, and social outcomes reinforce each other.

This is where place-based impact investing shines. It combines targeted tax incentives, social finance instruments, and capital deployment to stimulate growth in defined geographies. It’s a strategy that recognises the diversity of the UK economy and tailors solutions accordingly.

The Centre Ground

Politically, the government must hold the centre ground. Tax debates will dominate the headlines, but the real work lies in crafting a credible growth agenda. That means supporting startups, incentivising social investment, and deploying capital where it can do the most good. It means leading the conversation on tax—not just rates, but structure and purpose.

The November Budget is more than a fiscal event; it’s a chance to reset the narrative. The government must seize it—not with slogans, but with substance.

Ends.

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