While the Labour government has defended the move as a safeguarding measure to the European country’s last remaining primary steelmaking plant, along with thousands of jobs, Jingye Steel, calling the development something that “tramples upon international investment ‌rules”, has urged the government to fully and effectively compensate the company for all investment losses incurred in the decision.

The government, headed by the caretaker PM Keir Starmer, said the decision was taken in the national interest after failing to reach an agreement with Jingye that would secure the future of the business while delivering value for taxpayers.

The legislation enabling the takeover received final approval on July 15, allowing the government to assume ownership of the company.

Starmer, who would be relinquishing his chair this week, said the move would secure the future of domestic steel production, preserve skilled employment and protect a strategic industrial capability essential to Britain’s economy.

An agitated Jingye said on Sunday (July 19), “The ⁠British side disregarded dedicated ongoing investment and significant contributions, offering almost zero compensation.”

The company also pointed out that the United Kingdom had spent 377 million pounds (USD 507.18 million) to operate British ‌Steel ⁠as of the end of January 2026. As per the Chinese venture’s analysis, the amount would have exceeded 600 million pounds by the end ⁠of June, with expenditures possibly exceeding 1.5 billion pounds by 2028.

British Steel’s Scunthorpe works, which employs about 2,700 people directly and supports thousands more across the supply chain, is the United Kingdom’s only remaining producer of virgin steel made from iron ore. Its products are widely used in the rail, construction and automotive sectors.

The Labour government first seized operational control of the plant in April 2025 after Jingye warned it could shut the site. Since then, ministers have been funding operations while searching unsuccessfully for a private-sector solution.

Business Secretary Peter Kyle said maintaining primary steel production was critical to avoiding dependence on overseas suppliers for materials needed in key infrastructure projects. As per his estimations, the government had already spent around 640 million pounds to keep the plant operating, while current support exceeds 1 million pounds a day.

The takeover also reflects wider concerns about industrial resilience as global trade tensions and excess steel production continue to pressure European manufacturers. Britain has recently introduced tariffs and quotas to protect domestic producers from low-priced imports and agreed a steel tariff arrangement with the United States.

The Scunthorpe plant’s ageing blast furnaces remain central to the government’s strategy in the short term, although ministers intend to transition the industry towards lower-carbon electric arc furnaces over time. Such a shift may create an investment requirement of well over 1 billion pounds.

Industry body UK Steel welcomed the nationalisation, calling it the right decision to preserve an asset vital to national security and economic growth. It urged the government to move quickly with a long-term strategy that restores British Steel to commercial viability while investing in modern, low-carbon production.

An independent valuer will now determine whether compensation is payable to Jingye, which has argued the company remains a valuable asset despite years of mounting losses. The government has said it does not intend to retain ownership indefinitely but will seek a sustainable future for Britain’s steel industry under public stewardship.

However, China has jumped into the fray, with its Foreign Ministry now closely monitoring the situation while vowing to take appropriate measures to safeguard the legitimate rights and interests of Jingye Steel if warranted.

“The issue has drawn widespread attention in China. How Britain handles the matter ‌will ⁠directly affect Chinese investors’ confidence in the UK’s investment climate and shape public perceptions in China of the British government’s ⁠credibility,” the ministry remarked, while urging London to seek a mutually acceptable solution, including ⁠arrangements for compensation.

The post British Steel nationalisation: The next flashpoint in China-UK relations? appeared first on International Finance.

Despite the historic GCC deal, which saw the UK become the first one among the G7 (Group of Seven) to enter into a trade pact with the Middle East, the pressure on Starmer got unbearable. He ended up losing his popularity among his own Labour MPs.

The Starmer government’s struggle to improve UK’s stagnant living standards, along with the alleged mishandling of a £22 billion fiscal hole, brought the curtains down on the 63-year-old’s tenure in 10 Downing Street.

A lion’s share of the criticisms against the administration was directed towards its way of handling the stagnant British economy. Inflation, high energy prices, low productivity levels, rising unemployment and an underperforming SME, headwinds that arrested the European country’s growth.

A sector in distress

The SME sector occupies 99.9% of the overall British business landscape. Not only does it employ roughly 60% of the private sector workforce, but it also keeps the country’s growth engine chugging by contributing heavily in construction, professional, scientific and technical services, and manufacturing. Despite 68% of SMEs reportedly being profitable, many of them are facing hurdles on the scaling and cashflow fronts.

A 2025 report from Make UK, and think tanks Civitas and ERA Foundation, titled ‘The Growth Mission: A Blueprint for Scaling up SME Manufacturers’, made these discoveries: despite accounting for 99% of the 250,000 active manufacturing businesses in the United Kingdom, SMEs struggle to access finance during the ‘make or break’ seed to early growth stages of investment, a challenge which, if solved, could boost UK manufacturing investment by £9.2 billion annually.

“Almost two-thirds of these SMEs have ambitions to grow into large businesses over the next decade, which, if realised, could add £83 billion in value to manufacturing, and help propel the UK from the 12th largest manufacturing economy in the world to the seventh,” according to the report, a statement which gives a sad reflection on what could have been the story of the British SMEs had the government supported them.

To correct these issues and help SMEs scale up, the report made a number of recommendations to the Starmer administration, including the creation of an Estonia-style ‘British Business Burokratt Software’ tool to pool data collected by HMRC (His Majesty’s Revenue and Customs) and ONS (Office for National Statistics) that would help micro-target support to identified companies.

Another proposal was the introduction of a super-growth allowance (150% capital allowance), along with the formation of an enhanced Growth Enterprise Scheme (GEIS) to boost SME scale-up efforts.

In March 2026, exactly one year after, came the first-ever SME whitepaper from Lovey (formerly Love Finance), the United Kingdom’s fastest-growing SME lender and broker. Titled ‘The 2026 H1 SME Finance Outlook’, the research not only explored how SMEs accessed finance in 2025 but also examined their outlook, priorities and borrowing appetite for 2026.

The one similarity between the two studies is the discovery of the persistent financial pressure (tax burden and rising costs) on SMEs, while the lack of access to external finance results in missed scaling opportunities for these businesses.

Along with the independent creative market research agency Atomik Research, Lovey surveyed 504 British SME owners across the retail, manufacturing, hospitality and construction sectors between December 2025 and January 2026.

“The findings show that UK SMEs were entering 2026 with cautious optimism, balancing growth ambitions with economic pressures and a changing funding landscape. While confidence remains relatively strong, access to external finance continues to play a critical role in helping businesses invest, expand and respond to economic pressures,” the study observed.

While 82% of SMEs applied for external finance during 2025, 81% missed business opportunities due to a lack of finance. Despite 71% of the surveyed business bosses looking to seek external finance in 2026, tax burden (25%) and rising costs (24%) have remained the two biggest (and constant) growth barriers for them.

Why did 2025 become the year for ‘limited growth opportunities’ for British SMEs? The answers were rising costs, squeezed margins, and cash flow challenges. This unholy trinity created a situation where, due to the lack of funding, companies had to postpone or abandon expansion plans.

“Smaller SMEs were particularly affected. Among businesses with revenues between £500,000 and £1 million, 87% reported missing multiple opportunities due to lack of finance, compared with 82% of businesses with revenues between £250,000 and £500,000. Looking ahead, demand for finance remains strong across sectors. Hospitality businesses are the most likely to seek external finance in 2026 (89%), followed by manufacturing (71%), retail (66%) and construction (56%),” Lovey commented.

The research also highlighted regional disparities in access to funding. In the East Midlands, 96% of SMEs reported missing at least one opportunity due to lack of finance, followed by Wales (94%) and London (91%).

Unemployment numbers

In March, unemployment went up to 5.2%, the highest level since early 2021. More than 1.88 million people were out of work, an increase of 331,000 year-on-year.

Youth unemployment hit its five-year high of 14%, as 575,000 young people aged 18-24 remained jobless. Payrolled employees fell by 134,000 over 2025. Retail and hospitality got hit particularly, as 122,000 fewer people remained in payroll employment in these two sectors.

A month after, there wasn’t a big change. British businesses ​posted fewer job vacancies, with the Iran war starting to show its impact on the European country’s economy. Vacancies fell to 705,000 in the three months to April, the lowest number since the three months to ⁠February 2021.

Wage growth, excluding bonuses, stood at 3.4% in the first three months of 2026 compared ​with the same period in 2025, the slowest increase since 2020. The unemployment rate, a high-profile gauge of any economy’s health, ticked up to 5% for Q1, from 4.9% in the three months to February. The drop in payrolls in April 2026 also became the biggest since May 2020, at the start of the COVID-19 pandemic.

As per the ONS, lower-paying sectors like hospitality and retail saw some of the largest falls in payroll numbers and vacancies, with employers complaining that higher payroll taxes and a government ​reform to give workers more rights have ​made hiring more expensive.

In the words of Andrea Reynolds, a non-executive director for Berkshire Hathaway European Insurance, along with the CEO and founder of Swoop, a venture that simplifies the process of sourcing funding for SMEs, “Behind every redundancy, every unfilled vacancy, every shuttered shop front, there’s a small business owner who’s had to make an impossible choice.”

“From April 2025, employer National Insurance contributions rose from 13.8% to 15%, while the threshold at which employers start paying dropped from £9,100 to £5,000. For a business employing someone on £30,000, that’s an additional £866 per employee, per year, which many small businesses simply cannot absorb. Even for those that can, absorbing costs means lower profits. Lower profits mean less investment. Less growth. Fewer jobs,” she said in her article for EliteBusiness.

To complicate things further, every cycle of increase in the National Minimum Wage will make 2026 an expensive year for British businesses, amid headwinds like the Iran war and the resultant supply chain disruptions.

As per the Centre for Policy Studies, employer NICs (National Insurance Contributions) for a minimum wage employee will rise from £1,617 to £2,583 this year alone. Talking about a minimum wage increase, the latest ratio stands at £12.71 per hour for workers aged 21 and over, adding up to £900 more per year for full-time workers.

As per Reynolds, labour-intensive yet tight-margin sectors like hospitality, retail and caregiving; each wage hike cycle creates situations like job cuts, reduction in operational hours or, in the worst-case scenario, shutdown of the entire business. Her blunt advice to the Starmer administration was: if you want to tackle the growing menace of unemployment, you need to ease the cost of doing business for SMEs.

“Raise the VAT threshold. Immediately. The current threshold is £90,000, but if it were linked to inflation, it would be £103,000. Businesses are becoming VAT liable through inflation, rather than growth. The Federation of Small Businesses estimates VAT compliance adds £4,100 on average to a business’s running costs. I also know that struggling to pay the VAT bill can critically injure the cash flow of otherwise profitable businesses. So, raise the threshold and thousands of businesses will save thousands of pounds,” she stated.

Reynolds also suggested measures like reviewing employment costs.

“National Insurance, the national minimum wage, and business rates don’t exist in isolation. Each one compounds the others. Small businesses need breathing room, not a cascade of incremental tax rises that look manageable individually but are crippling collectively. Make it easier to access finance. Many SMEs are facing a cash flow crunch. They need working capital, not lectures. During Covid, government-backed schemes like CBILS and RLS improved access to alternative finance and simpler application processes. The government can pull this lever if they really want to,” she remarked.

Geopolitics poisons the cocktail

While the Iran war and the Hormuz stalemate have created one of the worst energy shocks the world has ever experienced, British SMEs will face rising energy bills as heating oil costs rise. As per The Guardian, about 7% of all small and medium-sized companies warm their properties and provide hot water using heating oil, whose price, in some cases, has more than doubled in recent weeks.

The situation has got complicated for businesses based in rural areas. Since they are not connected to the gas grid, they have to depend on heating oil. According to the Federation of Small Businesses (FSB), the material is used by about 17% of rural SMEs. And some of their members have already started rationing their fuel use to cope with the sharp rise in prices.

The FSB, which represents about 200,000 businesses and sole traders, has called on the United Kingdom’s competition watchdog to include the SME sector in its investigation into the price rise in the heating oil market. The trade body is equally apprehensive about rogue energy brokers taking advantage of the market crisis to push small companies into signing up to long-term deals on bad terms.

As per corporate restructuring specialist Begbies Traynor Group (BTG), the number of UK businesses in ‘critical financial distress’ has soared by more than a third. Hotels and leisure firms are particularly hard-hit, with mounting labour costs, increased tax burdens and now the Iran war making things difficult for them. The study came up with a disturbing ratio: a growing number of companies edged closer to collapse in Q1 2026.

Businesses considered to be in ‘critical financial distress’ surged by 36.9% to 62,193 for the period, compared with the same quarter in 2025. Concurrently, the number of businesses experiencing ‘significant’ financial distress rose by 9.6%, reaching a total of 634,867.

“Firms have contended with a series of tax increases throughout the year, including adjustments to national insurance contributions, further squeezing their finances. It also comes amid a backdrop of shaky consumer confidence, particularly affecting sectors reliant on discretionary spending habits. These challenges have been exacerbated by energy and materials inflation following the outbreak of war in the Middle East towards the end of the quarter,” BTG stated.

Recession fear

Add the S&P ‌Global’s preliminary UK Composite Purchasing Managers’ Index, which in May 2026 tumbled to 48.5 from 52.6 in April, its first reading ​below the 50.0 growth threshold since April 2025, indicating the kind of drop in activity British companies have been going through since 2025, with ‌the Iran war only piling up more problems for entrepreneurs.

Even though manufacturing firms reported a rush of orders, ‌the increase was largely due ⁠to clients trying to get ahead of possible further price increases or supply chain problems. Also, businesses are unsure about how long the energy prices will remain in the higher territory. Business owners have scaled back their hiring plans ​for the 20th month ​in a row, with expectations for future business being the lowest since April 2025.

The recession fears, especially in the SME circle, have hit their two-year high, according to iwoca’s SME Expert Index, which emerged in May.

As per the survey, 70% of participating finance brokers saw their SME clients getting worried about the rising energy prices, with over three-quarters (78%) expecting disruption to supply chains to negatively impact the business performance. Over half (54%) talked about entrepreneurs getting mentally prepared about the prospect of a recession, the highest level since Q3 2023 and up from 42% in Q4 2025.

Colin Goldstein, Chief Commercial Officer, UK, at iwoca, said, “These numbers reflect what we’re hearing from brokers – small businesses are worried, and the concerns are stacking up. Costs, inflation, supply chains: none of these have easy fixes. What SMEs can control is making sure they have the right financial backing to absorb shocks and keep moving. That’s where we come in, and it’s where we’re focused.”

Another report from the Item Club gave a harrowing stat: the UK is expected to lose around 163,000 jobs in 2026, with elevated energy costs, disrupted supply chains and squeezed household spending putting a dampening outlook on the overall economic health. The worst affected will be manufacturing and construction firms that are facing soaring operating costs.

All eyes on the Andy Burnham

Andrew Murray Burnham, a British politician who has been serving as Member of Parliament for Makerfield since June 2026, and is expected to take over from Starmer, needs to fix quite a lot of things. SMEs will be one among them.

It’s not like the Starmer administration didn’t do anything. In August 2025, it launched a scheme called ‘Backing Your Business’, under which a sweeping £4.5 billion funding package was announced to support SMEs. Then in March 2026, government departments, for the first time, set individual spending targets for SMEs to deliver over £7.4 billion a year to British businesses by 2028.

Billions were allotted separately to boost supply chains, with the goal of creating a thriving private sector that will drive GDP growth and generate wealth across the European country, apart from creating a massive number of jobs.

However, things on the ground look totally different. The SME sector looks squeezed, with recession fears kicking in among the business owners. The government wanted them to create jobs. The Item Club report says otherwise: potential loss of 163,000 jobs by this year-end.

Energy costs have continued to rise, forcing Chancellor Rachel Reeves to announce increased support for energy-intensive companies through the ‘British Industry Competitiveness Scheme’, which will be important for the UK construction and infrastructure supply chain, as it provides support for the manufacturing of steel, cement, ceramics, chemicals, glass, and heavy manufacturing.

During the peak of Iran war, Starmer promised to examine ‘every lever that’s available’ to help British households and industries cope with the crisis.

Ministers were reportedly told to work on support packages ‘that proved their worth during previous crises’. While the current energy price cap expires this summer, Starmer, in the days leading up to his shock resignation, indicated that this support would manifest as a fuel allowance for winter 2026, with the price shocks expected to continue for a good part of 2026.

To deal with the supply chain disruptions, the government is investing £100 million ($133 million) in reopening a carbon dioxide (CO₂) plant in Teesside. The facility, operated by Ensus at the Wilton International industrial site, had been mothballed since September 2025 after a trade deal with the US removed a tariff on American ethanol imports, making domestic production unviable.

While the move is going to take care of the CO₂ generation-related requirements to serve purposes like keeping packaged food fresh and carbonating soft drinks, it is also going to assist domains like water treatment, healthcare and the nuclear industry.

Elevated energy prices and supply chain disruptions will be the realities the British SMEs will have to deal with for the next few months. Burnham’s task should be a straightforward one: keep the assistance, both monetary and supply chain-wise, going, because SMEs are the nation’s growth engine.

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The trade deal comes with the potential of boosting the United Kingdom’s economy by an estimated 3.7 billion pounds (USD 4.9 billion) every year, apart from increasing wages by 1.9 billion pounds in the British mainland (on an annual basis) in the long run, said the UK’s Department for Business and Trade (DBT), while announcing the agreement.

“The UK could see a boost to growth and higher wages for decades to come after becoming the first G7 country to secure a trade deal with the Gulf Cooperation Council (GCC) today — strengthening our economic partnership with the region, supporting jobs in the long term, and bolstering domestic resilience. The deal with the GCC, which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, reflected the UK’s solidarity and long-term cooperation with its Gulf partners,” the DBT said.

“The deal will remove an estimated 580 million pounds in duties a year, based on current UK exports to the GCC, once the agreement is fully implemented, with 360 million pounds of this amount ‘to be removed on day one of the agreement entering into force’,” it stated further.

British exports of cereals, cheddar cheese, chocolate and butter will likely become tariff-free under the terms of the deal. The deal was the fifth in the line for the former European Union (EU) member, following similar arrangements with India, the United States, the EU and South Korea.

Sectors like automobile, aerospace, electronics and food and drink will get benefits too. In return, the European country has lowered tariffs on the GCC’s ⁠main exports to Britain. It is worth mentioning that the import of energy products is already tariff-free.

The deal will also serve as a breather for Starmer, who is currently facing challenges in terms of dealing with the fallout of the Iran war, with terms like “stagflation” and “recession risk” dominating the discourse among the analysts.

“At a time of increased instability, the announcement sends a clear signal of confidence – giving UK exporters the certainty they need to ⁠plan ahead,” Britain’s Trade Minister Peter Kyle said.

On the services front, the trade deal will ensure that Gulf businesses could expand in the United Kingdom without facing new barriers.

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London’s move also coincided with the waiver issued by the United States, under which purchases of Russian seaborne oil will support energy-vulnerable countries hit by supply disruptions.

Despite the criticisms about the waivers potentially weakening West’s economic efforts against the Kremlin’s war machine, administrations in Washington and London are in no mood to leave the rising fuel costs unattended, with the phenomenon putting a severe squeeze on both the households’ energy expenses and the operational margins of the airlines.

The budget airlines have been on dire straits, with fuel bills accounting up to a quarter of operating expenses. To deal with this, carriers globally have responded with fare increases, capacity cuts and warnings of weaker earnings.

In the United Kingdom, higher fuel costs have also fed into broader cost-of-living pressures, with the Starmer government seeking to be proactive in terms of addressing inflation and energy affordability-related concerns. While the inflation rate fell to 2.8% in April from March’s tally of 3.3%, due to lower electricity and gas bills, analysts from Cornwall Insight still predict the domestic energy price cap will rise by around 13% in July from the current levels.

Despite the lower inflation, the United Kingdom hardly has any room for error, with the Iran war weighing heavily upon its overall economic outlook. A cooling labour market, along with falling payrolls and job vacancies, is emerging as the pain point.

While Western sanctions, imposed since 2022 (the year the Ukraine war started), have sought to curb Moscow’s energy revenues, the main driver of its battle machine, Russian crude has been flowing to global markets, often via intermediaries like India and Turkey (in terms of refining and re-exporting energy products), thereby complicating enforcement as refined products are ⁠not typically classified as Russian-origin under standard trade rules.

Talking about the United Kingdom’s latest waiver, the time-limited licence will cover the maritime transportation of LNG from Russia’s Sakhalin-2 and Yamal projects and related services, including shipping, financing and brokering, under Russia’s sanctions rules until January 2027.

On the other hand, US Treasury Secretary Scott Bessent said that the extension of the 30-day general license will allow temporary access to Russian oil and petroleum products stranded on tankers without violating severe American sanctions on Russian oil majors.

“This extension will provide additional flexibility, and we will work with these nations to provide specific licenses as needed. This general licence will help stabilise the physical crude market and ensure oil reaches the most energy-vulnerable countries,” Bessent said, in a sharp U-turn from his April statement, where he told the Associated Press ⁠that no further extension of the Russian oil sanctions waiver was planned.

While the Donald Trump administration sanctioned Russian oil majors Rosneft and Lukoil in 2025 to pressure Moscow to end its Ukraine campaign, the ongoing Iran war has resulted in a situation change, with the US Treasury issuing back-to-back waivers since March 2026 to ease energy supply shortages and mitigate price spikes by releasing sanctioned Russian oil and petroleum products stranded in tankers. The waivers do not apply to oil now being pumped by Russia.

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British cities outside the capital city of London are currently facing a bigger shortfall in productivity compared with their counterparts ⁠in other countries, with outdated and limited transport links identified by organisations such as the OECD as a key factor.

“Rail links in the north, home to three of the five largest metropolitan areas in England, are plagued by bottlenecks on lines that date back to the ⁠Victorian era. Prime Minister Keir Starmer’s Labour government, lagging far behind the right-wing Reform Party UK in opinion polls, has said reducing regional inequality between London and ‍the rest of the UK is a top priority,” reported Reuters.

“If economic growth is the challenge, investment and renewal is the solution. That’s why we’re reversing years of chronic underinvestment in the North,” said Finance Minister Rachel Reeves.

Most of the spending, capped at 45 billion pounds in constant prices, will take place in the 2030s and 2040s. There will be no binding dates for opening, a lesson from the HS2 high-speed rail project that was cut short due to ballooning costs.

In October 2023, the then Conservative Prime Minister, Rishi Sunak, cancelled the northern leg of HS2 as costs soared, while the infrastructure watchdog warned there was a fundamental problem with Britain’s ability to manage such large projects.

The Starmer government now intends to build a new railway line between ‌Manchester and the central English city of Birmingham after completion of Northern Powerhouse Rail, although it would not be a “reinstatement” of former HS2 plans.

It stated that it was learning from the failures of HS2, which will now operate only between London and slightly north of Birmingham, with an opening date pushed beyond the previously targeted 2033.

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Heathrow Airport, the busiest airport in Europe by passenger volume in 2024, will begin construction of a new runway to “unlock even more of that connectivity, trade and economic growth for the United Kingdom,” according to a statement from the airport’s chief executive, Thomas Woldbye.

Istanbul Airport took second position, as it handled 84.4 million passengers last year, slightly less than Heathrow Airport’s 84.5 million. In December alone, nearly 7.2 million travellers passed through the hub. The good news comes amid the Keir Starmer government recently authorising the airport’s 49-billion-pound (USD 66 billion) expansion plan, as authorities endured years of legal struggle regarding the project.

While Heathrow Airport holds the annual record, Istanbul Airport actually surpassed Heathrow Airport in monthly passenger volume for much of the second half of 2025. This shift was driven by Istanbul Airport’s implementation of a world-first “triple runway” simultaneous operation system in April 2025, which increased the facility’s hourly capacity from 120 to 148 flights.

Unlike Heathrow Airport, which is physically limited by its current two runways and a 1,300-flight-per-day cap, Istanbul Airport’s purpose-built infrastructure allowed it to handle over 272,000 passengers on a single day in July, breaking the previous European daily record held by Heathrow.

This creates a narrative of “Old World vs New World” aviation, where Heathrow’s expansion is a race to regain a structural advantage that Istanbul Airport already possesses. Heathrow Airport claims that the project will boost capacity to up to 150 million passengers annually.

In Europe, where nations are divided between efforts to cut greenhouse gas emissions and the demands of a vital industry whose demand has skyrocketed since the COVID-era lockdowns, this would be an uncommon growth.

With flights anticipated to begin within ten years, the runway would cost 21 billion pounds. The remaining privately funded investment would be used to modernise and expand the airport.

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While the United Kingdom is facing persistent inflation, a sluggish economy, and a budget deficit, Rachel Reeves now faces an uphill task: boosting GDP growth without raising inflation while also shoring up public finances. In her second annual budget, the Chancellor presented her solution: a mix of tax hikes, while raising public investments, reducing energy bills, and extending the fuel duty cut.

In her second annual budget, Rachel Reeves hiked taxes by around 26 billion pounds by 2029-30. With the latest hike, the United Kingdom’s taxes rose to an all-time high of 38% of the GDP over the next five-year period.

Also, more than 1.7 million workers will likely either enter the taxable bracket or move into a newer tax bracket as the Keir Starmer administration has extended the freeze on income tax and national insurance thresholds till 2028.

While the tax thresholds will remain the same, even as salaries will rise, it will make people enter taxable brackets or move into higher brackets. Rachel Reeves has described the move as “taxation by stealth.”

In addition to the stealth tax, Rachel Reeves further targeted the European country’s rich with a new council tax surcharge for properties worth more than two million pounds. She also announced a 2% tax increase on income from dividends, savings, and property. She has now cut around 150 pounds off household energy bills from April 2026 by ending the Energy Company Obligation (Eco) scheme and funding 75% of the “Renewables Obligation.”

There will be a one-year freeze on regulated train fares, a freeze on prescription charges under the National Health Scheme (NHS), and an extension of a 5 pence a litre relaxation on fuel duty. The Keir Starmer government has estimated that these moves may bring down inflation by 0.4 percentage points.

To balance inflation management and growth, Rachel Reeves sought to bring the 0.4 percentage point reduction through targeted consumer price relief instead of demand-side tweaks that could have suppressed growth.

That’s why relief has come, why cutting duties and fares. She has also promised up to £ 120 billion in public investments to fuel growth, while estimating that public investments will be at the highest point in four decades with the move.

Budget Presented Amid A Delicate Situation

In 2025, the United Kingdom was not only one of the better performers among rich economies, but the International Monetary Fund (IMF) even said the European country was on track for the second-fastest growth in the G7 this year, only behind the United States. However, then came the summer and autumn numbers, and disappointment followed again. In the third quarter, the economy barely grew at all, just 0.1%.

Another headache has been government borrowing, which from April to October, reached its highest level since the COVID pandemic years. A big chunk of this was routine operational spending, the same category Rachel Reeves has promised to bring back into balance by the end of the ongoing decade. But with day-to-day borrowing hitting the 84-billion-pound mark, around 10% higher than in 2024, closing that gap won’t be simple.

While Rachel Reeves’ 2024 budget raised the minimum wage and increased employers’ national insurance contributions, companies have since been complaining about the pressure the policy has placed on their staffing budgets. While a slowed-down hiring has become the new normal, payroll data for September and October showed their steepest two-month drop since late 2020.

The unemployment rate has climbed back to 5.0%, the highest level in almost five years. Pay growth is also losing momentum. Average wages in the third quarter were only 0.5% higher than they were a year earlier. The ratio is a long way from the rapid pay rises British workers saw when inflation
was surging.

Households are tightening their belts too. In October 2025, retail sales, along with consumer confidence, fell for the first time since spring. The GfK index edged down in November, and the British Retail Consortium noted the biggest drop in shopper sentiment since April.

Talking about the thorn called inflation, the ratio, after falling sharply through 2024, ticked back up to 3.8% over the summer of 2025. Higher employer taxes added to business costs and played a role in that rise. Since Labour’s 2024 election win, the Bank of England has cut interest rates five times.

Even then, the rate sits at 4%, still twice the level set by the European Central Bank (ECB). Governor Andrew Bailey is open to easing the BoE’s monetary policy again if inflation continues to soften, while the Bank’s chief economist has taken a more cautious stance, saying he does not expect near-term data to change his view.

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Debt-to-GDP hovers around 100%, among the highest in the developed world, and borrowing has reached record monthly highs. In this context, newspapers and analysts have begun warning of a potential crisis reminiscent of the 1970s, even speculating about the possibility of an IMF rescue. Official voices and independent observers caution that while risks are real, an IMF bailout is not imminent as long as fiscal and economic reforms stay on track.

GDP stalls as inflation persists

Economic growth has been modest under the Keir Starmer government. After a strong start to the year (GDP rose 0.7% in Q1 2025), activity slowed sharply, with real GDP just 0.3% higher in Q2. This beat analysts’ forecasts (0.3% vs 0.1% expected), but firms and the government built up stockpiles and boosted spending ahead of known shocks. For example, businesses ramped production to avoid incoming American tariffs, and public sector outlays rose 1.2% in Q2. In contrast, private investment and consumer spending languished. Business investment fell 4% in Q2, and household spending was hardly up.

The Confederation of British Industry (CBI) warns that recent tax increases (higher national insurance and a higher minimum wage) have dampened firms’ hiring and investment plans, meaning growth is likely to remain subdued. Official forecasts now target only about 1-1.3% annual expansion in 2025-26, little up from the 1.2% and 1.4% predicted by the IMF. In short, the economy is no longer contracting, but growth is anaemic, leaving the United Kingdom the “joint-second” fastest grower in the G7 in Q2, alongside France.

Inflation remains elevated. Consumer prices (CPI) climbed 3.8% year-on-year in July 2025, the highest rate in the G7. Much of this reflects base effects (e.g. energy prices and airfares) and recent food cost rises, but the broader picture is worrying.

Wages are rising (regular pay growth around 5% in mid-2025), and corporate costs are up, while housing and transport prices are volatile. Critics note that stubborn price rises, coupled with a shrinking workforce, make it hard for inflation to fall to the Bank of England’s 2% goal. BoE Governor Andrew Bailey has flagged this “sticky” inflation as a chief concern.

Labour market, debt strains, and reforms

Signs of weakness also appear in the labour market. Official data show payrolled employment has been falling for months, and though wages still rise faster than inflation, slack is growing. The jobless rate ticked up to 4.7% in Q2 2025, and analysis by the Resolution Foundation suggests unemployment may hit around 5% this autumn. The number of people claiming jobless benefits has climbed sharply since Labour’s victory, reaching a record 6.5 million by mid-2025.

A particularly troubling aspect is the low labour-force participation, with 21% of prime-age Britons neither working nor seeking work, well above the pre-pandemic level. Governor Bailey and other officials point out that a falling workforce and ageing demographics are structural headwinds. Bailey warned at Jackson Hole that Britain now lags other advanced economies on workforce participation and must boost productivity to grow. This mismatch partly explains why UK inflation (at 3.8% in July) remains the highest among peer countries.

Behind these problems lie the public finances. Debt has ballooned, as the net government debt stands around 100-104% of GDP, near all-time highs. In January 2025, the UK ran the largest-ever monthly deficit (outside the pandemic), over £21 billion. This debt burden magnifies any shock. The IMF and the OBR warn that, at current trends, debt will rise sharply in the coming decades unless policymakers act. Labour’s early budgets reflect this pressure.

Chancellor Rachel Reeves has restored sound fiscal rules, raised taxes (for example, reversing a Tory cut in employers’ national insurance), and cut some spending (notably disability benefits) to trim the deficit. The IMF noted in July 2025 that these measures have “enhanced the credibility” of British fiscal policy, even as it cautioned that limited headroom means small shocks could breach the deficit target.

In practice, this has meant tight constraints, with many departments facing cuts or stagnation, while capital investment (in infrastructure, net-zero and innovation) has been prioritised. In effect, Treasury has chosen to “hold spending steady while targeting new investment on growth areas.”

After more than a year in power, the Starmer government has launched several initiatives. It made large capital commitments. For example, the 2025 Spending Review increased infrastructure, energy and defence investment substantially, even as day-to-day budgets were squeezed. Taxes have risen (e.g. overturning the NI cut, freezing personal allowances), and certain welfare payments have been trimmed to keep to fiscal targets.

On the growth front, the government has prioritised technology and industry. In January 2025, the Prime Minister unveiled an AI-focused growth plan, backing all 50 recommendations of the “AI Opportunities” review. This included new “AI Growth Zones” (fast-tracked planning for tech campuses) and a massive commitment to data centres.

It means that by that day, three firms had already pledged £14 billion in British AI data infrastructure and 13,250 jobs. For example, Vantage Data Centres announced a £12 billion expansion to build one of Europe’s largest campuses (11,500 jobs).

A new national supercomputer and an “AI Energy Council” were also proposed, tying digital strategy to industrial policy. In short, Whitehall is explicitly betting on AI, data centres and the so-called “digital economy” to drive future growth.

The government has also revived industrial strategy measures. It completed a free-trade deal with India and inked a preliminary “Economic Prosperity Deal” with the United States on limited tariff cuts. A UK-US full FTA remains under negotiation, but the May 2025 pact eliminated tariffs on aerospace and set a quota for car exports (100,000 vehicles per year, roughly equal to recent British output).

Domestic plans include a “Growth Mission” focusing on housing, childcare, and “green” industries. Labour has also promised to protect core services against drastic cuts, even as spending elsewhere is pared back.

Despite this activity, critics say hard reforms have lagged. Planned measures to improve labour supply have been watered down amid political resistance, and productivity-boosting reforms are slow to roll out.

As one analysis notes, Reeves’ early fiscal changes were “relatively modest,” leaving only small room for slack in the rules.

The budget and spending announcements have largely kept the promise of higher living standards, but only over a multi-year horizon, with actual disposable incomes still squeezed in the near term. In sum, the government is delivering on long-term industrial strategy and stabilising the public finances, but many promised reforms are still only beginning to materialise.

Trade deals with US and India

The UK recently secured two headline trade agreements, with mixed impacts. In May 2025, London and Washington signed the so-called “Economic Prosperity Deal.” This quasi-deal is not yet a full free-trade treaty, but it pledges mutual tariff reductions and opens a path to further talks. Crucially, the US agreed to scrap tariffs on British aerospace parts and cut auto tariffs to 10% (from 27.5%) on up to 100,000 British-made cars per year.

In return, London committed to the quota system. However, Trump’s administration kept the existing 25% duties on British steel and aluminium in place. The deal is legally non-binding, and many details remain unresolved (for example, American law permits higher 10% “baseline” tariffs on cars even after the deal).

In practice, the immediate benefits seem limited, as direct UK exports to the United States account for only about 7% of overall British exports, and the tariffs on metals are effectively unchanged until a future quota system is set up. In the long run, a deeper UK-US FTA could boost investment and consumer choice, but for now, analysts caution that trade barriers remain mostly intact.

Even more transformative is the UK-India free trade agreement signed in July 2025. After three and a half years of talks, Prime Minister Starmer and India’s Narendra Modi hailed a “historic” deal. Official estimates project it could add about £4.8 billion a year to UK GDP and attract £6 billion in bi-directional investment.

Key elements include steep cuts in tariffs, as on average, British exporters will see duties on their goods fall from 15% to around 3%. For example, UK whisky and spirits face half the tariff immediately, with further cuts later; the auto, food and garment sectors also gain improved market access. This opens up India’s 1.4 billion consumers to British products.

However, experts caution that the deal has big gaps. It contains virtually no new liberalisation for UK services or finance and lacks binding provisions on environmental and labour standards. Critics note that India’s average tariff (13%) is still much higher than the United Kingdom’s (1.5%), so the principal gains may be for goods exporters. The agreement will only take effect after parliamentary ratification, so benefits lie ahead.

In the longer run, openness to Indian markets could help sectors like whisky, pharmaceuticals, and automotive parts. But because underlying structural issues remain, any boost may be gradual. In sum, the deals with the United States and India promise targeted export growth but are unlikely to be a panacea for the economy’s deep problems. As OECD notes, trade openness helps, but “very thin fiscal buffers” and global uncertainties mean growth will stay weak unless domestic reforms keep pace.

Ambitious AI action plan

A centrepiece of the government’s strategy is boosting high-tech capacity at home, especially data centres and semiconductors. The Labour administration has deliberately courted large tech projects. The AI Action Plan and Digital Strategy have helped secure about £25 billion in data centre investment since last summer.

That includes Vantage Data Centres’ £12 billion Welsh campus and Nscale’s multi-billion-pound AI data campus in Essex. These projects will certainly create some high-skilled jobs and upgrade the UK’s digital infrastructure.

But experts warn the net benefits may be overstated. Data centres consume enormous amounts of electricity and water. As one analysis starkly put it, “They suck up energy and water and don’t employ many people, but the UK economy really needs more data centres.”

In other words, the environmental cost is high, and the direct job creation is modest, especially compared to heavy industries.

Even the Treasury’s own AI plan acknowledges the need to manage the energy demand (it set up an “AI Energy Council” to tackle that challenge). Some analysts fear we may end up with beautiful tech parks that boost nominal GDP but leave local economies little better off.

Thus, while the government’s data-centre push aligns with its AI ambitions, observers note that sustainability and genuine productivity gains must be assured if it is to pay off in the broader economy.

The semiconductor sector is seen similarly as a future growth area. The United Kingdom launched a National Semiconductor Strategy (in May 2024), aiming to capture a slice of the global chip market, particularly niche fields like compound semiconductors (advanced materials for 5G, lidar and power electronics).

The government pledged in its last term to invest £1 billion in chips and set up a Semiconductor Advisory Panel. However, the new government has been noncommittal on those headline targets, and as reported in mid-2024, ministers declined to guarantee the full £1 billion, focusing instead on leveraging private capital.

Analysts and bank views: The diagnosis

What do experts say is ailing the economy? Across the board, the consensus is that Britain faces weak productivity and structural weakness more than any single shock. Bank of England chief Andrew Bailey calls the situation “an acute challenge,” citing slow growth and falling labour participation after the COVID-19 pandemic. His worry, echoed by many, is that chronic factors are dragging growth down.

In Bailey’s view, the economy is “well at the bottom of the league table” on key metrics of workforce and output. He and other BoE officials stress boosting productivity via technology and reform, rather than relying solely on low interest rates. Indeed, Bank staff told Reuters they expect more monetary easing only if inflation falls decisively; for now, the July inflation surprise was deemed temporary.

International bodies echo this. The IMF’s mid-2025 review applauds the government’s “good balance” of supporting growth while reducing deficits and projects 1.2-1.4% growth as easing continues. But it warns of “significant risks,” such as volatile markets, rigid public finances, and little fiscal headroom, meaning any shock could force belt-tightening or expose the United Kingdom to higher debt dynamics.

The OECD similarly downgraded the British growth forecasts (to 1% for 2026) and noted that very thin fiscal buffers leave the UK exposed. In private, one IMF economist reportedly told The Telegraph that policy uncertainty and debt could make the situation “as perilous as 1976.” Publicly, however, Fund staff have emphasised that a bailout is not on the table as long as the government sticks to its plans.

Heading for a bailout?

Chancellor Reeves repeatedly says the United Kingdom has no reason to seek IMF aid, and has not signalled any such need. Unlike in 1976, today’s policymakers have set clear fiscal targets and are credibly pursuing them, which keeps the public debt trajectory only gradually rising (the OBR forecasts net debt barely above 100% of GDP in 2026).

The British economy is beset by stagnant growth, stubborn inflation, and high debt, a fragile mix that has sparked chatter of an IMF rescue. So far, however, Labour has taken steps to address the situation by raising taxes and cutting spending to meet strict fiscal rules, while launching ambitious investments in infrastructure and technology.

Chief economists and officials stress that these moves have improved credibility, even if the progress is just beginning. Critics say the government must go further, but there is no sign of an immediate crisis. Whether that remains true will depend on whether growth can firm up and borrowing falls back once the temporary shocks pass.

The post Stubborn inflation weighs on UK’s economy appeared first on International Finance.

In November 2024 at the Rio G20, Prime Minister Keir Starmer became the first British leader to meet President Xi Jinping since 2018, pledging a “consistent, durable, respectful” partnership.

This rebuff of the previous government’s frosty stance signals Labour’s intention to steady Britain’s China policy. In Labour’s telling, the Conservatives’ 14 years of “inconsistency” left UK-China relations badly in need of a “long-term and strategic approach.”

Under Starmer’s “pragmatic” vision, Britain will cooperate with China on trade and green energy where interests align, but still “compete” economically and “challenge” Beijing on security and human rights where necessary.

From golden era to deep freeze

To grasp Labour’s change in approach, it’s important to remember the fluctuations in Britain’s China policy. In the early 2010s, Prime Minister David Cameron promoted a “Golden Era” of engagement with China. He sought Chinese investment and famously invited Xi Jinping for a state visit, even sharing a photo while enjoying a pint of ale.

Back then, London gambled that supporting China’s economic rise would boost UK business. But this “mercurialist opportunism” proved short-lived. By the late 2010s, Britain had grown alarmed at Beijing’s hardline turn, which included the clampdown on Hong Kong dissidents, abuse of Uyghurs in Xinjiang, and aggressive actions in the South China Sea that alarmed parliament.

Successive Conservative prime ministers stiffened their rhetoric. Boris Johnson and Liz Truss called China a strategic threat, and the UK banned Huawei from its 5G networks. In Sunak’s 2021 Integrated Review, Beijing was labelled an “epoch-defining systemic challenge” and “the greatest state-based threat to our economic security.”

Labour’s last time in government, from Tony Blair to Gordon Brown (1997– 2010), was primarily characterised by a pro-engagement approach. New Labour viewed China in terms of trade and diplomacy, exemplified by the handover of Hong Kong to China in 1997 and the support for large Chinese-funded projects, such as Thames Water. However, even during that era, Labour governments understood the importance of addressing human rights issues with Beijing, albeit behind the scenes.

Over the past three decades, UK policy has swung like a pendulum— alternating between friendly engagement and investment under Blair and Cameron, and adversarial rhetoric framing China as a threat under Sunak.

Labour and Conservative critics alike contend that this policy pendulum has bred confusion. In its manifesto, Labour condemned 14 years of what it called “damaging Conservative inconsistency” on China, pledging instead to bring clarity, strategy, and a steady hand.

Labour’s new China policy

Upon taking office in July 2024, Starmer’s government pledged a “full audit” of UK–China relations, which they described as an in-depth review covering everything from trade and investment to security and supply chains. The audit (still ongoing) is meant to define a coherent China strategy, reversing what Labour sees as years of flip-flopping.

Officially, the new stance is straightforward, emphasising the need to cooperate wherever possible, compete where necessary, and challenge when required. In practice, ministers have begun outreach. Foreign Secretary David Lammy, in October 2024, made the first UK ministerial trip to Beijing in six years, promising to find “pragmatic solutions” and praising the “vast scope of mutually beneficial economic cooperation.”

Chancellor Rachel Reeves likewise flew to Beijing as her first overseas trip of 2025, announcing deals she estimated would add £600 million to the British economy over five years. Business Secretary Jonathan Reynolds has signalled his eagerness to revive long-frozen trade talks (the JETCO and Economic-Financial Dialogue) with China.

Starmer himself has adopted a moderately upbeat language. At the Rio summit, he said the UK and China are “both global players, both permanent members of the United Nations Security Council,” and promised “serious, pragmatic discussions” with Xi on trade, the economy, climate, science and more.

He emphasised making relations “consistent, durable” to avoid last-minute surprises. Labour spokesmen also stress that Britain will remain a “predictable, consistent sovereign actor committed to the rule of law,” even as it deepens dialogue with Beijing.

Yet critics note that a debate still rages within government. Some, notably Treasury ministers like Reeves, advocate for closer ties to spur growth, while security hardliners—known as “securocrats” in Whitehall lingo—urge caution. The delayed and scaled-down audit report, which is now expected to be released only in part this spring, reflects these underlying tensions.

Labour argues that by formally engaging China, it can speak more candidly on tough issues, while human rights groups worry the balance is tipping too far toward accommodation. As one analysis put it, Labour’s audit risks becoming “little more than a postmortem,” with “cooperate” the only surviving policy pillar.

So far, Starmer has talked of a “strong UK–China relationship” (to echo Cameron’s phrase), but also promised a “strategic and long-term” partnership that upholds British interests and values.

Economic imperatives

At the heart of Labour’s outreach is economics. Britain’s economy is under pressure, with sluggish growth, high borrowing costs, and post-Brexit trade challenges, while China continues to be the world’s second-largest market. The Starmer government sees Chinese trade and investment as too big to ignore. Indeed, China has already poured more into the UK economy (some £68.5 billion since 2000) than it has into any other European country.

London wants more of that money, especially in sectors like clean energy, advanced manufacturing and financial services. Reeves and Reynolds have hinted that even state-backed Chinese investment could be welcome if it helps jobs and innovation, provided it doesn’t compromise national security.

British businesses are drawn to China because it represents a vast and promising customer base. Labour points out that re-engaging could boost exports of cars, machinery, financial services and other UK strengths. For example, Chinese carmakers are expanding in Britain and could deepen ties.

The government is exploring fresh trade agreements and supply chain partnerships, and even sectoral deals to open up markets for British producers. Reeves’s recent visit aimed to “concrete” deals worth hundreds of millions, underscoring the growth argument.

Global supply chains also play a role. Many British industries rely on parts and technology from China, so a frigid relationship risks disruptions and higher costs. Labour argues that engagement lets the UK push for more “resilient” supply chains, rather than pushing China-driven manufacturing onto China’s rivals.

Ministers aim to rebuild dialogue, including efforts to revive the long-dormant UK–China Joint Economic Commission, to avoid a damaging trade war and gain leverage to shape rules on tech transfer and subsidies.

That said, economists caution that the bonanza may be overstated. After years of intense strategic rivalry, Chinese firms have grown wary of investing in the UK. An analyst notes that Chinese investment into Europe plunged to its lowest level since 2010 in 2023, and Beijing’s high domestic savings mean it may not need foreign help.

Indeed, Foreign Policy recently warned that “China is simply unlikely to invest much in Britain,” despite London’s olive branch, given Beijing’s concerns and tighter scrutiny from allies. Still, Labour’s message is that even a modest uptick in trade could help a struggling British economy, and that hedging against global risks is worth it.

Political calculations

Labour’s China policy is as much about politics as economics. Domestically, delivering growth and jobs is Starmer’s top priority; success in attracting investment could neutralise charges that Labour is weak on China or misguided about rights.

By contrast, resuming trade talks enables Labour to assert that it is standing up for British businesses, a crucial move if economic growth falls short. In this light, Reeves’s £600m deal was touted as a vindication of “pragmatic engagement” with China.

Globally, Labour may see reengagement as a way to burnish Britain’s influence. As the UK advances its post-Brexit ambitions in Asia, including the Indo-Pacific “tilt,” CPTPP negotiations, and deeper ties with India, Australia, and others, maintaining influence with China could prove to be a valuable diplomatic asset.

London hopes to secure a seat at the table on major global issues by opening channels on climate change, AI, and development, which ministers often describe as areas more conducive to cooperation. Some strategists also argue that a neutral UK with friends on both sides could moderate great-power competition; Starmer’s team talks of avoiding Washington’s trade war with China in favour of multilateral solutions.

Electorally, Labour may calculate that the British public cares more about economic well-being than China’s internal politics. Polls suggest most voters are not narrowly fixated on Beijing; they want cheaper goods and more jobs. Engaging China can therefore be framed as patriotic pragmatism, involving the use of every available tool to grow the economy while still rejecting unfair practices. By contrast, opposing all Chinese engagement might be framed as ceding British wealth to the likes of France or Germany, a tough sell to voters amid cost-of-living pressures.

However, Labour must tread carefully. Critics, particularly on the right, paint any rapprochement as weakness. After Starmer’s Xi meeting, some commentators warned it would “strain UK–US relations” and signal submissiveness, since China was arresting Hong Kong protesters at the same time.

Some MPs are sceptical that China will respond in kind; reports suggest even Chinese state media has doubted Britain’s sincerity, wondering if London could be “fair” to Beijing. Still, by acknowledging shared global responsibilities (multilateralism, climate, stability), Labour aims to justify its approach as safeguarding UK interests in a multipolar world.

Security and ethical concerns

No discussion of China can ignore deep security and human-rights fears. Labour publicly promises to “stand with” Hong Kong’s exiles in the UK and safeguard British values.

In practice, ministers say they will “challenge where we must,” which means Beijing can expect blunt criticism over Hong Kong’s national-security law, abuses in Xinjiang, and its support for Russia. For example, after Reeves’s China trip, she pointedly raised the cases of Hong Kong dissidents and China’s role in the Ukraine War. Foreign Secretary Lammy similarly told Wang Yi that Xinjiang and Hong Kong must be discussed even if “viewpoints diverge.”

On security, Labour faces pressure to continue Conservative-era safeguards. London has already used its 2021 National Security and Investment Act to block or scrutinise Chinese takeovers in tech (like the semiconductor plants). Ministers are now considering whether to blacklist parts of the Chinese state under a new Foreign Influence Registration Scheme, and have installed a National Protective Security Agency to help businesses resist espionage.

In other words, trade with China is being opened only to a limited extent, as deep tech, telecoms, and critical infrastructure will remain off-limits. Even within Labour’s pro-business wing, there’s recognition that some sectors must be kept secure.

The ethical dimension is thornier. Starmer’s government avoids provocative gestures, such as refraining from formally declaring Xinjiang a genocide despite pressure from some MPs, but maintains that it will not turn a blind eye to abuses. Labour says re-engagement is precisely a tool to gain leverage on sensitive issues.

A recent House of Lords briefing notes that the new Foreign Office approach is described as “cautious cooperation and challenge,” involving collaboration with China on trade and green energy while consistently raising concerns about human rights.

In his speeches, Starmer has stated that he intends to match China’s candour, reflecting Xi’s call for “tough-minded honesty” in discussions about global power dynamics. Whether Beijing will accept British criticism of, say, Xinjiang or Hong Kong in return for access to markets is uncertain.

Britain also must guard against covert threats. A series of spy scandals, ranging from a Chinese agent in Parliament to suspected cyber-attacks on the Ministry of Defence, has intensified concern in Whitehall. Labour diplomats argue that engaging China on economic fronts could facilitate intelligence sharing on cyber issues or counter-espionage. However, critics warn that the opposite may occur, with relaxed ties potentially offering Beijing more channels to influence UK public life.

Some advocacy groups drew tens of thousands to protest a plan for a new “mega-embassy” for China in London, warning it could become a hub for surveillance or propaganda. In sum, Labour’s China policy insists it will protect sovereignty and values even while trading, but it remains to be seen how robustly that line will be defended.

A high-stakes gamble

Labour’s China strategy is a high-stakes bet, with potential upsides but serious pitfalls. On the reward side, even small wins could matter. Smoother UK-China trade may lower costs for British consumers and boost exporters. Chinese investment in infrastructure or tech could fill funding gaps the Treasury can’t.

More engagement also gives the UK more insight into Beijing’s thinking on Taiwan or North Korea, possibly giving London influence in crisis moments. Business lobbies generally support the outreach, arguing that isolation from Asia’s largest economy would be more harmful.

However, downsides loom large. Many experts warn that China will not rush to invest in Britain because the economy is relatively small, now outside the EU single market, and Beijing has domestic priorities. Foreign Policy bluntly noted that “China is simply unlikely to invest much in Britain,” pointing out that Chinese FDI in Europe is now at near-record lows.

There’s also the risk of damage to alliances, as a too-cosy approach might upset Washington and Canberra and could erode moral credibility on rights. Labour’s critics fret that investors back home or overseas could shun the UK if they fear a security laxity. For instance, China could learn where the UK’s vulnerabilities lie.

On the domestic front, the government could face a political backlash if any China-linked project goes awry. For example, this occurred with British Steel’s Chinese ownership. Similarly, Starmer could be criticised if he appears to endorse autocracy. The recent spat over Jingye Steel, where officials alternately threatened and then courted the Chinese owner of British Steel, shows how quickly the needle can swing.

Labour’s leaders insist that difficult issues like Hong Kong will not be swept under the rug, but human rights groups are already accusing Starmer of softpedalling on genocide concerns. Any perception of a U-turn on values could dent the party’s image among voters who prioritise Britain’s global leadership on democracy.

Finally, there is strategic risk. If Beijing fails to deliver the hoped-for gains, such as investment, trade deals, or support on world issues, then Labour will have little to show for letting relations warm. And if the United States increases its pressure, such as by dragging the United Kingdom into a tariff war or encouraging allies to reject Huawei in 6G technology, Britain may find itself squeezed. The rewards may be uneven, while the risks affect national security and alliances.

Labour’s China outreach marks a significant departure from the recent freeze in UK policy. Framing it as sober realpolitik, Starmer’s government has explicitly pitched a middle way between Cameron-era naivety and Sunak-era confrontation.

The new approach rests on compartmentalising economics from geopolitics, aiming to welcome Chinese money and trade deals while maintaining strong national security and keeping human rights on the agenda. This balanced posture, described as “cooperate, compete and challenge,” has support in business circles but attracts criticism from hawks and activists.

For now, Labour’s strategy serves as a test of its foreign-policy credibility. If China responds in kind, such as by reopening markets or softening some harsh policies, the government will claim vindication. If not, critics will charge that Starmer’s warmth has bought little and cost valuable goodwill among allies.

Either way, the choice to reset relations is reshaping Britain’s global posture. As Britain’s House of Lords briefing dryly notes, the onus is on London to deliver a “consistent, long-term and strategic approach.”

In a world where tensions between the US and China dominate headlines, Britain’s gamble is to chart its own course. The coming months will reveal whether that course brings prosperity or peril, and whether Labour’s promise of pragmatism proves successful.

However, a recent emergency move by the British Parliament to take control of a Chinese-owned British steel mill has struck a discordant note amid all the diplomacy. It could raise deeper questions about Starmer’s efforts to cultivate warmer ties with China, at a time when Donald Trump’s tariffs are sowing fears about protectionism and fraying trade agreements worldwide, forcing the European country to find geopolitical hedges.

Britain intervened to stop a Chinese-owned plant in Scunthorpe from closing its blast furnaces, risking 2,700 jobs and a strategic supply. Failed talks sparked accusations of bad faith and raised concerns over Chinese investment in sensitive sectors.

Meanwhile, Hong Kong barred MP Wera Hobhouse, a critic of its free speech record. As Starmer seeks to revive the “Golden Era” of Sino-British ties, tensions and mistrust remain, leaving the future of cooperation uncertain.

The post UK seeks new chapter in China ties appeared first on International Finance.

British businesses will bear the brunt of Reeves’ 40-billion-pound total tax rise. It means more than half of the tax rises in the Budget will be paid for by employers, with the increase in the amount they pay in National Insurance on workers’ wages expected to generate 25 billion pounds a year.

“There are two significant increases around NI that employers will have to consider, both of which are due to apply from 6 April 2025: Employer NIC will increase from the current rate of 13.8% to 15%, and the per-employee threshold at which employers become liable to pay NI will be reduced from GBP 9,100 per year to GBP 5,000 per year,” stated an analysis from insurance brokerage major Lockton Companies.

The increase in employers’ social security contributions has put many business owners on edge. The largest tax increase package in thirty years was part of Reeves’ first budget, which she characterised as a “once-in-a-generation” move to modernise the economy and invest in public services.

Although there were some exemptions or relief for the smallest firms, the increase in National Insurance will have major cost implications for established businesses, as they will have to pay higher minimum wages, higher business rates, and bear the cost of adapting to new workers’ rights under new laws. Firms have warned that such extra costs could ultimately impact the Keir Starmer government’s goal of growing the UK economy. However, according to Reeves, the “only way” to drive growth is through investment, warning that “there are no shortcuts.”

“The rate that employers pay in contributions will rise from 13.8% to 15% on a worker’s earnings above 175 pounds from April. The threshold at which employers start paying the tax on each employee’s salary will be reduced from 9,100 pounds per year to 5,000 pounds. However, the Chancellor said she would extend the Employers Allowance—the amount employers can claim back from their National Insurance bill—from 5,000 pounds to 10,500 pounds,” stated a BBC report back in October 2024, when the “Autumn Budget” had just been passed by the British Parliament.

From April 2025, the minimum wage for 21-year-olds, known officially as the National Living Wage, will rise from 11.44 pounds to 12.21 pounds. For 18 to 20-year-olds, the minimum wage will rise from 8.60 pounds to 10 pounds.

Apprentices will see their pay jump from 6.40 pounds to 7.55 pounds an hour. The current 75% discount to rates, due to expire in April 2025, will be replaced by a discount of 40%, up to a maximum of 110,000 pounds. It still means that many businesses will see their business rates more than double. Also, plans to upgrade workers’ rights will cost businesses up to 5 billion pounds a year to implement, according to the Keir Starmer government’s own analysis.

Tough Times For Companies Ahead

There are concerns that the rise in taxes will end up hitting workers and consumers. In some cases, companies could pass on the increased costs they face through higher prices; however, employee wage rises could be restricted as employers look for savings. Other tax revenues could also be hit if firms make smaller profits and people receive smaller pay packets.

The Office for Budget Responsibility, the UK’s official economic forecaster, said it assumed “most” of the increased National Insurance cost would be passed on to workers and consumers from employers through lower wages and higher prices. Leading business groups, however, said as soon as the “Autumn Budget” was released in October 2024 that the policy document was a “tough” one for ventures, pointing to the National Insurance hike as a blow to the ability of firms to invest.

“At first blush, there is precious little in the government’s first Budget which offers anything other than short-term pain,” said Roger Barker, director of policy at the Institute of Directors. Rain Newton-Smith, chief executive of the CBI (Confederation of British Industry), which claims to represent 170,000 firms, said the burden on business would make it “more expensive to hire people or give pay rises.”

The Keir Starmer government is pledging to be both “pro-business” and “pro-worker” in its policy decisions, and Reeves, during the past year, confirmed Income Tax, National Insurance for employees, and VAT would not be increased.

She also offered some relief to small firms by uplifting the amount they can claim back off their National Insurance bill. However, Reeves also said the 75% relief on business rates, which are charged on most non-domestic properties such as shops, offices, pubs, and factories, and were due to expire this April, would be replaced by a 40% discount for retail, hospitality, and leisure companies.

According to commercial real estate intelligence firm Altus Group, the average shop’s business rates will jump from 3,589 pounds to 8,613 pounds in April 2025, while pub costs will increase from 3,938 pounds to 9,451 pounds. Restaurants’ average business rates bills will rise from 5,051 pounds to 12,122 pounds.

Hiring Affected

The so-called “tax wedge,” or the gap between employers’ labour costs and workers’ take-home pay, is smaller in Britain than in its European counterparts due to decades of government policy that prioritises hiring. However, a push to reduce that gap would not be easy.

While some businesses intend to increase automation—for example, retailer Currys has announced that it will switch from paper price labels to electronic labelling—the majority of employers are thinking about reducing hiring and delaying wage increases in response to Reeves’ budget.

According to Steve Hardeman, owner of Clevedon Fasteners, a company that manufactures parts for engineering and construction companies, the social security and minimum wage increases would be the equivalent of hiring two more employees for his current staff of 28.

Rory O’Keefe, commercial director of Europlaz, a company that makes medical devices, told Reuters that his company would take three students on temporary placements rather than hiring graduates and had hired two employees on fixed-term rather than permanent contracts.

The impact of the budget changes is being closely watched by the Bank of England (BoE). After three gradual interest rate cuts since August 2024—fewer than in the US and the Eurozone—Governor Andrew Bailey and his colleagues say they anticipate continuing to lower rates.

“The BoE emphasised the uncertainty looming over the economy. A worldwide trade war is one of them, and it might lead to a slowdown and lower inflation. However, according to DotBoE surveys of British businesses, the most common responses to Reeves’ budget are higher prices and an attempt to absorb the hit to profit margins. That risk increased when US President Donald Trump announced a sharp increase in tariffs on imports from around the world,” Reuters noted.

“The central bank ran the risk of underestimating the price impact of the changes,” according to former BoE economist Rob Wood.

These changes were expected to add half a percentage point to an inflation rate that was already being pressured by other one-time costs and could even push it above 4% later in 2025, up from just under 3% at the moment. Although it would more than double the BoE’s 2% target, it would still be far lower than the inflation rate of 11% in 2022.

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