Where We Are: Sluggish Growth and Policy Uncertainty

The current state of the UK economy is one experiencing slow and uneven growth. GDP in Q1 2025 rose by 0.7%, up by 0.1% from the previous quarter, but the month-on-month figure for April showed a larger-than-forecasted drop of 0.3% (ONS, 2025).

From a domestic perspective, key challenges remain, with the common theme being uncertainty. Fiscal policy remains muted under the current Labour government, which has decided to maintain the existing income tax thresholds—frozen until April 2028 as set by former Chancellor Jeremy Hunt (HM Treasury, Autumn Statement 2022). Recent wage growth, which is barely outstripping inflation, has resulted in fiscal drag, with more workers pulled into higher tax bands. This reduces real disposable income, particularly for middle earners, and tightens long-term consumption-led growth (IFS, 2024).

Income tax and National Insurance contributions (NICs) should be combined for simplicity, and bands increased across all ranges to reduce the burden of taxation across the labour force and smooth effective marginal tax rates. Low- and middle-income earners will benefit most from this, increasing aggregate demand (OECD Economic Surveys: United Kingdom 2022).

The latest NIC employer rate was raised from 13.8% to 15% in April 2025—effectively a “tax on jobs”—and should be reversed to lower the direct cost for businesses hiring additional employees (HMRC, 2025 Budget Summary). Small businesses are impacted most as they often cannot fully utilise the benefits of the expanded £100,000 Employment Allowance cap, which was put in place to offset the rise (HMRC Employer Bulletin, April 2025).

SMEs are vital to the economy, accounting for 99.9% of all private-sector businesses in the UK, 60% of private-sector employment, and generating 52% of private-sector turnover in 2024 (FSB, UK Small Business Statistics 2024). It is essential for policymakers to support them with looser regulatory measures than their larger counterparts and improved access to finance. Currently, UK business investment remains consistently lower than that of G7 peers and has lagged as a share of GDP in almost every year for the past three decades (Bank of England, Investment Trends Report 2024).

The additional £500 million allocated in April 2025 to the Growth Guarantee Scheme is a welcome step, but has only a marginal impact on closing the estimated long-term credit gap of up to £90 billion (British Business Bank, Small Business Finance Markets Report 2025). Alongside the expansion of the scheme, underwriting criteria should be loosened to reduce reliance on personal guarantees and increase accessibility.

These measures are also intended to boost UK productivity growth, which has largely stalled since the 2008 financial crisis (ONS, Labour Productivity Overview). This must be part of a broader strategic review addressing skills shortages in digital technology, engineering, manufacturing, healthcare, and construction—sectors identified by the UK Commission for Employment and Skills as persistently understaffed (UKCES, 2023). Regional rebalancing is also vital, with greater investment in job opportunities in the North and Midlands to address structural imbalances (Levelling Up White Paper, 2022).

The UK’s sluggish growth demands strong action from policymakers. Simplifying and reforming income tax and NICs for both employees and employers will immediately increase take-home pay and reduce the cost of hiring. Strengthening SME support via greater access to finance and streamlined regulation will catalyse private-sector growth. Finally, a clear plan to close skill gaps and reduce South-centric economic bias will drive long-term productivity. Effective communication from government and a bold commitment to these plans are critical to restoring business confidence and laying the foundations for a more prosperous UK.