The Government Is Regulating the Economy to Death

A gloomy Budget is around the corner, with rumours of income tax hikes flying around Westminster and the newspaper pages. The Chancellor of the Exchequer, Rachel Reeves, has been given bad news from the Office for Budget Responsibility: productivity is lower than previously feared, and the economic and fiscal outlooks are bleak. This is a far cry from Reeves’ declaration in 2024 that her fiscal policies were “fixing the foundations” of the economy, and that sunshine and abundance lay just around the corner.

Today, the foundations seem full of holes, even larger than the alleged “black hole” left in the public finances by the previous government. The Government is scrapping around for things to blame. Recently, they have decided that Brexit is at fault, despite the parlous state of the European Union’s economy, arguably worse than our own. Anything to distract from choices closer to home.

The Government has waged regulatory and financial war on British businesses

The Government is going to embark on a round of tax rises — breaking its election manifesto promises — because of its own spending decisions. Pay rises for striking train drivers and NHS staff, increases in welfare benefits, exorbitant costs of housing illegal immigrants all add up in the end, and somebody has to foot the bill. But there are other policy decisions which are to blame for the Government deciding that it is obliged to put its hands in the British people’s pockets once again.

Since 2024, the Government has waged regulatory and financial war on British businesses. It is hard to overstate how aggressive its policies towards anyone daring to employ somebody else or build a business have been. The increase in Employers’ National Insurance, significant rises to the minimum wage and, of course, the looming imposition of the Employment Rights Bill are a brutal trifecta for businesses of all shapes and sizes.

The Growth Commission believes that the Employment Rights Bill could cost up to £76 billion in lost economic activity, roughly =£1100 per person. This is an extraordinary imposition on British business, far greater than the Government’s own estimation of the costs of this Bill, which suggested that it would cost businesses around £5 billion.

The Government’s assessment is likely a huge underestimation, as its impact assessment did not account for the total effect on the economy, preferring to conduct purely static analysis on the administrative burden of the Bill — time taken by form-filling, for example — instead of examining whether the changes would deter businesses from hiring and expanding their operations. This is part of a long-standing failure by successive British governments, both left and right, to properly calculate the costs of its policies. The Employment Rights Bill is an especially egregious example, however, as its economic effects are already playing out before it has even become law.

The British labour market has essentially ground to a halt. Graduates are facing the toughest prospects in years. Graduate job vacancies have fallen by about a third over the last year, now at the lowest level since 2018. Across the total labour market there are around 800,000 vacancies, significantly below pre-pandemic levels. The only parts of the economy which seem to be expanding in headcount are those in the public sector or dependent on taxpayer money, such as social care. The private sector — which actually generates the economic activity and tax revenues which pay for the public sector — is being squeezed, and there seems to be little respite coming down the track.

The Employment Rights Bill will turn Britain’s traditionally flexible (by European standards) labour market into something much more akin to the rigid and expensive markets in France or Spain, countries which have had historically much higher unemployment, especially among young people, than the UK. Some of the most costly measures in the Bill are rights against unfair dismissal from day-one for employees; making flexible working a default option on request; a ban on zero-hour contracts; as well as pro-diversity measures like mandating equality action plans and restrictions on third-party “harassment” now known as the infamous “banter ban”.

All these measures increase the risk and cost of hiring new people and growing businesses. With the minimum wage now sitting at such high levels — equivalent to a full-time salary of around £25,000 — employers in sectors such as hospitality are becoming increasingly cautious about taking on new employees. This is contributing to higher than expected inflation in Britain compared with other countries, leading to higher food prices, even after the inflationary shocks from the Ukraine war have subsided.

It is as if the Government has forgotten, or does not care, how economic activity and tax revenues are created. A circus of tax-and-spend is to be expected from a Labour government, naturally. But today’s situation is especially dire. Employers have shouldered the burden of the Government’s tax raising so far, contributing an extra £23 billion to the exchequer following the increase in Employers’ National Insurance. Business is the lifeblood of the economy. Without it, we do not have any kind of public services.

But with vacancies and hiring in freefall, and continuous stories about businesses de-listing from the London Stock Exchange, companies moving abroad, and British people of all income levels moving to low-tax destinations like the United Arab Emirates, it seems like the Government is running out of road. The Employment Rights Bill should be stopped in its tracks and forgotten about. That is unlikely, of course. Advocates of a so-called Great Repeal, or Restoration, who are numerous on the British Right today, should therefore ensure the forthcoming Employment Rights Act is high up the list of laws to be removed, so British businesses can open their doors to trade once again.