Press & Policy

Chancellor Rachel Reeves’ third Mansion House speech focused on financial stability and sought to defend Labour’s economic record after just over two years in government.

The Chancellor argued that she has boosted growth, investment and productivity, lowered inflation, and repaired the public finances, all under the headline that Britain’s economy is on a stronger footing.

While businesses across Scotland and the UK have shown resilience in the face of various external challenges, policy decisions in recent years have also limited the ability of firms to grow, invest and recruit. It is worth reflecting on the choices made in the very first budget delivered by the Chancellor in October 2024. It was the first Labour budget in 14 years, the first ever delivered by a female chancellor. It was also significant for the scale of the additional burden it placed on employers.

The headline measure was the increase in employer National Insurance Contributions, with the rate rising from 13.8% to 15% and the threshold at which employers begin paying reduced from £9,100 to £5,000. Since taking effect in April 2025, these changes have added materially to the cost of employment and have remained a consistent concern for businesses.

Alongside higher employment costs, businesses also faced increases in the National Living Wage, adding further pressure to operating costs. Although smaller employers benefited from a more generous Employment Allowance, which was increased to £10,500, many medium and large businesses have seen the combined effect of these measures constrain recruitment, reduce investment, put downward pressure on wage growth and, in some cases, lead to higher prices for consumers.

On the other hand, there were clear themes in the speech that businesses will hope are carried on by the next government.

The Government has sought to improve the environment for business through measures to expand access to finance for SMEs, encourage investment, reduce unnecessary regulation and strengthen trade links with Europe. Alongside this, support for venture capital, skills and AI adoption reflects a greater focus on improving long-term productivity.

The next government should also consider policies that reward businesses for investing in people, rather than simply increasing the cost of employment.

Rather than relying primarily on higher payroll taxation to raise revenue, future governments should consider how the tax system can encourage labour market participation and investment in skills.

International examples demonstrate that this can be achieved through targeted tax incentives that encourage workforce participation and productivity.

Portugal’s IRS Jovem scheme offers one example of how targeted tax incentives can help address labour market challenges. By offering tapered tax relief to younger workers over several years, it has helped improve talent retention, encourage return migration and make the country more attractive to skilled workers.

No policy can be transplanted directly from one economy to another, but the principle is clear: well-designed tax incentives can support economic growth while addressing labour market challenges.

As the UK seeks to improve productivity and strengthen business confidence, future policy should focus on rewarding investment, supporting workforce development and creating the conditions in which businesses can grow. That means treating business not simply as a source of tax revenue, but as a partner in delivering long-term prosperity.

From a business perspective, the Chancellor’s Mansion House speech contained several themes that will be welcomed, particularly the focus on investment, productivity and long-term growth.

The decisions taken in this Government’s first Budget continue to shape business confidence, recruitment and investment today. As the next Government considers its priorities, it should ensure the tax system rewards firms that create jobs, invest in skills and increase productivity. If businesses are expected to lead the UK’s economic recovery, the Government should give them every opportunity to do so.