Business investment and labour supply is priority for the UK’s economic growth – London Business News | Londonlovesbusiness.com

The UK economy is gathering pace after a spell of weak growth in the context of challenging economic conditions around geopolitical tensions, elevated inflation and rising interest rates.

A comprehensive reform agenda is needed to sustain the momentum and stimulate medium-term growth, according to the latest OECD Economic Survey of the United Kingdom.

The country’s economic outlook is gradually improving.

The OECD projects GDP growth at 1.1% in 2024 and 1.2% in 2025, up from 0.1% in 2023. Headline inflation is expected to continue moderating towards target, with energy and food price pressures having eased. However, persistent services price pressures will keep core inflation elevated at 3.7% in 2024 and 2.8% in 2025, requiring monetary policy to remain restrictive.

Substantial government support provided during the COVID-19 pandemic and the energy price crisis has been wound down, though it has pushed up public debt. Spending pressures are set to increase due to population ageing and the investments necessary to support the climate transition. Tax reforms aimed at reducing tax exemptions and increasing compliance could help rebuild fiscal space and reduce distortions.

Low investment has contributed to sluggish productivity growth since the global financial crisis. A transparent government strategy to support business investment could help unlock the country’s growth potential. Access to finance needs to be improved for small, innovative firms, and full expensing in combination with interest rate deductibility in the corporate tax system should be monitored to avoid subsidising unprofitable investment.

Employment growth has remained weak since the pandemic and inactivity has increased, most notably due to long-term sickness. Strengthening work incentives by reforming the work capability assessment to ensure that income support is not conditional upon being found unfit for work would help raise labour force participation. Successfully implementing the expanded childcare support programme, alongside reforms to apprenticeships aimed at hiring and training young, lower-skilled persons and early school leavers, would also boost employment growth.

The United Kingdom remains among global leaders in reducing greenhouse gas emissions, but progress in the residential housing sector should accelerate to meet the net-zero target. The government’s strategy to decarbonise housing could be strengthened through better pricing signals and timelines for tighter regulation. Expanding the availability of green financing products could help households overcome high up-front costs for investing in clean heating and energy efficiency measures.