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One year of Labour: Market sentiment sours as growth stalls

Date: 02 July 2025

2 minute read

2 July 2025

If you are covering the first year of the Labour government, please see the following comment from Lindsay James, investment strategist at Quilter:

“One year into Labour’s time in office, market sentiment is shifting as the ramifications of a series of ideologically driven policy decisions begin to emerge. The party’s sweeping electoral win came with considerable support from financial markets, but recent developments - particularly the rise of Reform - introduce new uncertainty ahead of the next electoral cycle unless a more pragmatic course is adopted.

“The capital gains tax increase has had an adverse fiscal impact, with receipts dropping 10% year-on-year. This, coupled with the departure of wealthy non-doms, risks further eroding the UK’s economy. Meanwhile, rising employer tax burdens have coincided with the sharpest fall in job numbers since the pandemic, all taking place in an environment of increasingly thin fiscal buffers. The ever-present threat of future tax changes is now seemingly acting as a deterrent to investment and growth.

“Infrastructure remains a stated priority and is a welcome attempt to address chronic underinvestment that has resulted in productivity shortfalls. However, the reality has seen a refocus on defence, while the NHS continues to command an ever-growing share of public funds, limiting flexibility elsewhere.

“Sectors reliant on large workforces, including the likes of retail, hospitality, social care, have borne the brunt of increased National Insurance costs. Traditional energy providers and North Sea oil producers also face increased headwinds.

“That said, there are some industries experiencing tangible benefits. Defence is enjoying a substantial uplift in capital commitments, with an increase of 48% in real terms over this parliament, and the government’s net zero commitment has driven momentum in decarbonisation, renewables and nuclear and the finalisation of the first Small Modular Reactor competitive tender. Planning reform and targeted housing initiatives are welcome developments for construction, despite ongoing labour and skills constraints.

“The recent spending review reflected a pragmatic balancing act, with logical priorities set out within tight fiscal limits. Whether this approach lays a foundation for longer-term success will depend on the government’s ability to deploy resources efficiently and break the emerging cycle where weak growth leads to higher taxes, which in turn undermines future growth potential. However, the effective abandonment of welfare cuts shows just how much the government is struggling to make big changes, and the recent climbdown could serve to encourage further rebellion. With incredibly limited fiscal headroom, the Chancellor has a challenging road ahead.”

Megan Southwell

External Communications Manager