Director Weekly  The economic challenges facing the UK are mounting – and while external threats to growth are real, the situation hasn’t been helped by key government decisions

The government faces a toxic cocktail of weak economic growth, rising expenditure, high national debt, and higher borrowing costs. Ministers have their work cut out as they grapple with the dual challenge of getting the economy going and managing the public finances.

Here are three key developments from the past week – and thoughts on where government might start to develop solutions.

1. Economic confidence remains low The IoD’s Director Economic Confidence Index rose 11 points between July and August – but only to -61, having previously plummeted to -72, the worst reading on record. Its current level is comparable to the early pandemic.
   • There are some positive signs. Directors’ confidence in their own organisations has increased, as have investment intentions and revenue expectations. Yet the overall picture remains gloomy.

2. The UK is vulnerable to global risks There is growing concern over political developments in France, and the US – particularly as borrowing is soaring in the latter even as an unprecedented tussle unfolds between the White House and the Federal Reserve. A crisis on either side of the Atlantic could hit the UK hard – and that risk is already pushing borrowing costs upwards.

3. Week is bookended by changes to the PM’s team The government may have hoped for a positive market reaction to the mini-reshuffle early last week that saw Chief Secretary to the Treasury, Darren Jones MP, appointed as Chief Secretary to the Prime Minister, among other changes. But these changes were then dwarfed by the ministerial reshuffle that the Prime Minister was forced to make on Friday, triggered by the resignation of Angela Rayner, the Deputy Prime Minister and Housing Secretary. Personnel shifts can be helpful but are not enough to restore confidence, either in financial markets or among businesses: in the end, actions speak louder than words.

Where next?

There are no easy solutions to the economic and fiscal conundrums facing the government. International headwinds present their own challenges – but it must also be acknowledged that things have been made worse by domestic policy decisions that have hit business hard, not least the last Budget’s tax rises.

The concern is that there’s more to come. Directors already highlight the existing employment regulation as a top brake on growth – yet the Employment Rights Bill risks making things worse. They are also increasingly worried that business will be targeted again with tax increases.

So what could the government do? Clearly there will be no tax giveaways at the Budget, but the Treasury has signalled its interest in tax simplification. Progress here would be welcomed by business.

The government should also redouble efforts to address the major pain points affecting business. A strategy for bringing down energy costs – and not only for the priority sectors identified in the Growth Strategy – would be hugely helpful. Businesses will be hoping that the resignation of Angela Rayner, the leading advocate and architect of the Employment Rights Bill, as well the wholesale ministerial changes at the Department for Business and Trade, provide an opportunity to make significant changes to the content and implementation of these proposals. Addressing this would be a shot in the arm for employers, too.

Ministers should also try to dampen down pre-Budget speculation. Rumours and conjecture erode business confidence, as we saw last year: optimism fell sharply in August 2024, long before the Budget’s tax increases were actually unveiled. Ruling out further tax increases where possible – and not floating ideas in the press, which directly fuels speculation – would be helpful.

Ultimately, the government must also get a grip on public spending. About half of government spending for the coming period has been settled via the Spending Review, but half is still in play – including pensions and benefits. Retreats on planned welfare reforms earlier this year leave the Chancellor with a bigger ‘black hole’ to fill this autumn. She will surely have to revisit these critical areas of expenditure.

Otherwise, the government may need to break its manifesto pledges not to touch VAT, income tax or personal national insurance payments if it needs to raise substantial amounts of revenue while minimising economic damage.

All courses of action are politically fraught. But the current direction of travel is unsustainable. Change is needed.