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Business in Britain after the Vote: Change, Caution, and Continuity

Agora Strategy Executive Briefing on elections in the UK
Agora Strategy Executive Briefing on elections in the UK

Executive Summary

  • The Labour Party is set to sweep to power on 4 July with a landslide majority of 150-200+ seats, as the governing Conservatives face unprecedented losses.

  • A Labour government led by Sir Keir Starmer will seek closer relations with the EU and for the UK to remain an active player in international matters, but the scale of domestic and geoeconomic problems severely limit its room for manoeuvre.

  • Labour have promised no major tax rises and only limited policy change, but the country’s poor economic outlook makes keeping up either extremely difficult.

Implications for International Business

  • Labour have ruled out increasing income tax, VAT, and national insurance contributions, but have not done so for some others, e.g. on capital gains, second homes, and shares.

  • In fact, they propose £8.6 billion in tax increases, such as a windfall tax of £1.2bn from oil and gas companies and increased taxes for non-domiciled taxpayers.

  • There will be some easing of obstacles to EU-UK trade, but more significant changes, such as the UK rejoining the Single Market, have been ruled out. 

State of Play

Change is inevitable, but will come slowly

After 14 years in power, an exhausted Conservative Party led by Prime Minister Rishi Sunak will suffer a landslide defeat on 4 July. With a record majority, a Labour-led government could be more stable and predictable than its counterparts in France or the United States. Also, markets have anticipated a change of government so no sudden shocks are expected. Yet, Labour will inherit one of the worst economic and fiscal outlooks for any government since 1945. Long-term problems of low investment and productivity have mixed with austerity, Brexit, and Covid to leave Britain with stagnant growth, tight finances, and underfunded and crumbling public services. Voters are angry at the longest waiting lists at the National Health Service (NHS) on record, prisons at breaking point, large swathes of local government on the verge of bankruptcy, a housing and infrastructure crisis, immigration at record highs, and average earnings which, when adjusted for inflation, have barely moved since 2009. The UK’s standard of living is not expected to return to pre-pandemic levels until 2025, making the 2019-2024 parliament the first ever when living standards at the start were higher than those at the end.


Labour have promised change, but stress caution to assure voters that they will not be reckless. The result has been an election manifesto committed to modest tax rises and spending commitments. This is based on an unrealistic hope that growth will come from political stability unlocking investment. While stability of government will be welcomed by the public, businesses, investors, and allies, it will be insufficient to generate the growth and change needed. The independent Institute for Fiscal Studies has calculated that without tax rises or increased borrowing by 2028-29 there will be a £20 billion shortfall in government spending; it bluntly described the unwillingness of both major parties to confront this reality as a ‘conspiracy of silence.’ Caution also defines Labour’s approach to international matters. There will be small but welcome changes to UK-EU relations, but no return to the single market despite the isolation and stagnation wrought by Brexit. In the face of growing geoeconomic competition there will be a greater stress on the UK state as the motor for growth and investment, what Labour have labelled ‘securonomics’. However, initiatives such as GB Energy, a new state-owned energy company that will invest in renewables, and a new £7.3 billion National Wealth Fund will take time to deliver.

Key Issues Re-anchoring the UK in the West

Within a few days of becoming prime minister, Sir Keir Starmer will meet with other Western leaders at the NATO summit in Washington, DC from 9-11 July. It will be the first opportunity for him to set out an international agenda that David Lammy, who is expected to become Labour’s foreign secretary, defined as ‘progressive realism.’ Much like on domestic matters, it is a policy of gradual change that contains a large degree of continuity and caution. On strategically important matters such as Ukraine, Labour will be as steadfast in its support as the previous government. The party has also committed to raising defence spending to 2.5% of GDP, though without a fixed date. A security review in the first 100 days is expected to stress the need for the UK to respond to the weaponization of economic interdependence. The audit will review relations with China, with Labour stressing the need to ‘compete, challenge and cooperate’. The defence pact with Australia and the US (AUKUS) has moved London closer to America’s approach of challenging Beijing. Likewise, the UK government has encouraged companies to ‘de-risk’ relations with China, although it risks being caught between similar efforts by the USA and EU.


Also in July, Starmer will host around 50 leaders of the European Political Community, the new pan-European group convening all countries of the continent (including Turkey, but not Russia and Belarus). This will allow him to present European partners with more constructive and conciliatory terms than they often received from the Tories. The result will be a widely anticipated UK-EU defence and security pact. At the same time, Labour has been clear that there will be ‘no single market membership, no customs union, and no freedom of movement.’ These red lines, intended to limit accusations that Labour will backtrack on Brexit, will be progressively tested as the new government has to confront some of the UK economy’s underlying problems. Europe has become more, not less important to the UK’s economy since Brexit.


A Labour government’s progressive realism, however, will be limited by the scale of domestic challenges, leaving Starmer little bandwidth to engage on international matters. EU leaders will also have noticed Nigel Farage’s return to UK politics as the leader of the Reform Party, which might merge with – or, rather, usurp – the Tories. That will fuel uncertainty as to whether a change to a Labour government will lead to longer-term changes in UK attitudes to the EU. Finally, the prospect of Donald Trump’s return to the Oval Office has led even Labour to reach out to the Republican Party. Efforts to coordinate transatlantic relations with European partners could be tested by a temptation to maintain the US-UK ‘special relationship’ by stressing the UK’s defence spending and non-membership of the EU, which both appeal to Trump.

Britain still lagging on global trade

Labour offers few solutions to the drag that Brexit has had on the UK economy, contributing to a decline in business investment and lowering the country’s ‘trade openness’. Goods exports and imports since 2019 have been the weakest in the G7, with exports from high-value manufacturing sectors being especially hard hit, e.g. chemical exports down 15% since 2018. Brexit has disrupted supply chains, increasing costs that hurt small and medium sized businesses more than large companies. While the UK has signed some trade agreements around the world, their effect on trade has been negligible. As a result, the EU’s place as the UK’s most important trading partner has grown. In contrast, the UK has outperformed most other advanced economies in services exports: ‘Other business services’ (e.g. legal services, business consultancy and accounting) are now the UK’s leading export sector, on which Brexit has imposed fewer costs than on the more regulated financial services sector. The EU’s continued importance to UK businesses explains why despite fears that it would proactively diverge from EU regulations, the UK has remained closely aligned. Instead, ‘passive divergence’, where the UK struggles to keep up with the pace of EU legislation, has begun to emerge in areas from product repairability to supply chain due diligence.


Reversing the drag of Brexit on the UK economy will require larger changes than those proposed as part of a review of the UK-EU Trade and Cooperation Agreement in 2026. While a phytosanitary agreement, some mutual recognition of professional qualifications, an agreement on youth mobility, and a defence and security agreement will be welcome, they cannot repair the damage of Brexit or facilitate additional growth of services exports. That will require the UK and EU to discuss access to the single market and customs union, which neither side are keen to explore. As older Eurosceptic voters are replaced by younger pro-European voters, Labour’s electoral room for manoeuvre may change in the long term, but for now, the EU economy and its regulations are advancing, while the UK struggles to play catch-up.


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