Labour’s unemployment trap

Critics say that the government’s economic plans are riddled with contradictory policies

Picture by Simon Dawson / No 10 Downing Street

The government’s economic policies risk placing Britain in an unemployment trap, in which plans to boost employment are undermined by higher tax and regulatory burdens on employers, according to critics.

Today, the Prime Minister Sir Keir Starmer has announced that Britain “simply isn’t working” as his government unveiled a series of new policies designed to combat worklessness and increase employment. Broadly, the Prime Minister’s solution is to overhaul job centres, send NHS staff to areas with high rates of chronic unemployment to clear backlogs, and provide “a more personalised” service for those looking for work.

The policies target a serious problem that has plagued the British economy since the pandemic. Currently, there are 2.8 million people across the country out of work due to long-term sickness. Correspondingly, public spending on sickness benefits is due to exceed £100 billion by 2029 – more than double the pre-pandemic level. For context, the UK is due to commit £57.1 billion to defence during 2024/2025 under current spending plans.

Yet today’s announcement has laid bare the contradictions at the heart of Labour’s economic vision. The Prime Minister will struggle to combat Britain’s worklessness crisis or cut its spiralling welfare bill so long as his government lumbers employers with heavier burdens and creates an unattractive environment for investors.

Indeed, the government’s approach to the private sector threatens to undermine its war on worklessness. By raising employers’ national insurance contributions in the recent budget, the Chancellor, Rachel Reeves, brushed aside warnings from British businesses that higher contributions will likely force employers to reduce wages or forego expanding their businesses.

On top of this, the Regulatory Policy Committee has warned that the government’s flagship legislation on employment rights is “not fit for purpose”. The independent watchdog warns that the legislation, which is being spearheaded by the Deputy Prime Minister, Angela Rayner, will impose an estimated £5 billion cost per year on businesses.

The Committee concluded: “The proposals could make it more difficult for those unemployed or economically inactive to access jobs … and could lead to increased reliance on internal hiring or recruitment based on personal networks.”

The contradictions do not end there. This is a government which, so it claims, wants to increase investment in the UK, as was signalled by Starmer’s meeting with Larry Fink, the CEO of Blackrock, in Downing Street last week. Yet it also wants to make it harder to invest in oil and gas, is seeking to clamp down on Non-Dom status and believes that those who derive income from assets and investments are not “working people”. 

Tellingly, there are signs that ministers know they have overdone the pressure on business. The government is preparing to reduce financial penalties imposed on car manufacturers that fail to meet production targets for electric vehicles. Under the current plans, due to come into force in January, carmakers would have to ensure that 28 per cent of their cars and 16 per cent of their vans are EVs or face a £15,000 green fine for every vehicle manufactured outside of the target.

However, ministers are now reported to be drawing up plans to reduce the planned fines that will be levied after manufacturers warned that the government’s production targets are exceeding demand for EVs. This afternoon, Stellantis, the parent company of Vauxhall, announced that it will be forced to close its factory in Luton – a move which places over 1,000 jobs at risk.

Taken together, the worry must be that Labour’s economic policies show a disregard for the concerns of business. More alarmingly, they indicate that Labour is resorting to its knee-jerk response of using a bigger state to solve pressing economic problems, enlarging the public sector at the expense of the private sector.

Yet public-sector initiatives to encourage Britain’s unemployed will be of little use if employers are forced to cut back their workforces or lower wages. And providing a personalised approach to job-seeking is unlikely to be effective if the government cannot also inspire a genuine will to work. The government may find that it is difficult to tackle the behaviour and incentives that underpin worklessness without making the politically difficult decision to cut back the generosity of the welfare state.

Ultimately, the government’s contradictory policies on work and welfare all appear to indicate that the man at the top – the Prime Minister himself – lacks a clear economic vision for the country. The danger is that Labour’s incoherent set of policies will ensnare the British economy in a trap of higher unemployment, lower productivity and stagnating growth. 

Jack Dickens

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