Director Weekly One year into the Labour government, challenges abound

The government has made much of its growth mission – and important elements of the approach have become clearer now the infrastructure, industrial and trade strategy papers have been published.

Yet even setting aside the drama that surrounded the Chancellor this week, there are three pressing economic questions at the top of the agenda.

1. Can the government find ways to help business break free of the gloom?

The IoD Directors’ Economic Confidence Index fell back to -53 in June, after rising for three months in a row to reach -35 in May. In doing so, it has lost about half the gains made since November.

The data makes clear that economic conditions are increasingly challenging. Tax measures announced in the 2024 Autumn Budget have now taken effect and directors see changes to national insurance, and business and agricultural property relief, as particularly unwelcome.

Those measures are adding to the pressure being felt by businesses. The government might have hoped that June’s sequence of strategy papers would have boosted confidence, but our discussions with directors offer little to suggest that hope has been realised.

Each strategy contains many sensible measures, and against a better backdrop, they would have been welcomed as striking a reasonable balance between ambition and caution. Fundamentally, however, they are incremental and long-term plans – and as decisions made at the Autumn Budget bite, businesses are desperate for something that provides a more immediate boost.

That means there is more than ever riding on planning reform and deregulation. Businesses will be looking for rapid progress after the summer.

2. How will the government handle the consequences of abandoning its welfare reforms?

If falling confidence is reflected in weaker GDP numbers in the coming months, it will only compound the other major problem that emerged this week: the £5bn hole in the public finances created by the government’s retreat on welfare reform.

There are three basic ways to plug such a hole: reduce spending, increase tax, or borrow more. While departmental budgets have now been set, welfare spending sits in the other half of public sector spending which is under pressure from growing disability benefit claims and rising debt interest payments. The Chancellor’s fiscal rules preclude additional borrowing for this day-to-day spending – so the likelihood of tax rises in the autumn seems to have gone up sharply.

The bond markets will be watching closely for signals of how the government will proceed – as will employers, given how they were hit by last year’s Budget.

3. How will US tariffs play out?

The 90-day pause on President Trump’s sweeping tariff plans expires on 9 July. With uncertainty about what happens next, this could be a perilous moment for the global economy.

The UK’s deal with the US – which has now been implemented – mitigates the worst of the tariffs, and could give UK car makers and aerospace firms some competitive advantages. Concerns remain though, especially around steel.

But that is not the whole story. The UK is vulnerable to indirect tariff effects, too. A US-EU trade war would be particularly damaging, given the UK’s reliance on EU trade: a slowdown on the Continent could have a big impact on this side of the Channel. Reports of progress towards a US-EU deal in principle, at least, are welcome – but uncertainty will remain until the political picture becomes clearer.

The UK economy faces major headwinds – some the result of domestic policy decisions. Navigating through the coming months will be far from simple.

Find out more about the latest data from the IoD Directors’ Economic Confidence Index here.