Client Update - 12th September 2025

Whilst I am sure this is not what he would have wanted, Prime Minister Sir Keir Starmer has sought to create opportunity after the departure of his scandal-hit deputy Angela Rayner. A sweeping cabinet reshuffle will look to strengthen delivery of his floundering government’s priorities, and crucially, to mend ties with business leaders. As noted in the FT - a “Budget board” has been set up, linking top ministers with Number 10 and the Treasury to attempt to avoid further rifts with the corporate world.

For the government to stand any chance of boosting growth — its overwhelming priority — few things are more important than getting business back on side. Many companies gave Labour the benefit of the doubt at last year’s election. After bearing the brunt of the £40bn tax rises in last autumn’s Budget and being hit with costly employment rights legislation, many have since rued that choice.

While Labour officials talk of improving communications, business leaders do not want to hear the same messages repeated once again, just by different messengers. They crave a two-way communication process, where ministers also heed and act on business warnings over the negative repercussions of policies, including for growth. New business secretary Peter Kyle has reiterated Labour’s pitch to be an “active partner” with business, but many companies would prefer the government to create a supportive and stable environment then largely keep out of the way and stop tinkering with the finances.

As chancellor Rachel Reeves seeks to fill a fiscal hole of, well, who knows, but let’s say at least £20bn in the November Budget, it is vital she does not compound last year’s missteps by heaping yet more tax on employers. An early way to start restoring business goodwill and reduce the dangers of a further slowdown in hiring, would be to rein back the employment rights bill now that Rayner, its main champion, has stepped down.

One key concession would be to grant employees protection against unfair dismissal after six months, down from the current two years — an amendment already passed by the House of Lords — rather than day one as originally planned. Day one rights are a deterrent especially for smaller businesses to hire as they immediately risk costly tribunals over dismissals of workers who prove unsuitable.

It now appears that much of the labour party conference season will be spent pitching for the new deputy Prime Minister. To run for either the leadership or the deputy leadership of the Labour party, you have to clear two hurdles. The first is getting 20% of your colleagues to back you (as it stands, that is 80 MPs). The second is getting the support either of three affiliates (two of whom must be trade unions), or 5% of local parties.

Who would run to be the leadership’s preferred candidate in the deputy leadership race? That has been the number one topic of conversation in the Parliamentary Labour party since Angela Rayner’s resignation. The early front runner appears to be Bridget Phillipson, secretary of state for education. Keir Starmer has long believed that Phillipson’s was the most important endorsement he received when running for leader. She backed his leadership bid early on, helping to shore up a number of his weaknesses. Phillipson was an early supporter of a second referendum and a committed pro-European, while Starmer at the time was seen by Labour remainers as a bit of a Johnny-come-lately, having only come around to the idea in 2018. And she stayed out of Jeremy Corbyn’s front bench, unlike Starmer.

Instead of worrying about the leadership race, I would rather that the Labour party were focussing their efforts on alternative options to higher taxes in the November budget. The scale of the hole in the public finances — to be spelled out in the Budget on November 26th — will be heavily influenced by judgments from the Office for Budget Responsibility (OBR) about productivity. The decision gives the OBR enormous influence over Britain’s economic and political fortunes. Andrew Bailey, Bank of England governor, said in June that the central bank was “sceptical” about OBR predictions that growth will rebound.

The OBR calls productivity one of its “most important and uncertain forecast judgements.” Slower trend productivity growth can mean weaker income growth — and thus income tax receipts — as well as soggier corporate profits. A small adjustment could, therefore, spell the difference between a benign budget outlook and further deficits. At present, the OBR expects average trend productivity growth of 1% a year in the coming five years, reaching 1.3% in 2029-30. Trimming just 0.1% off the forecast would drive a £9bn deterioration in the current budget balance in 2029-30, and remember Reeves only had £9.9bn of headroom against her key fiscal rule. A 0.5% cut would open a politically disastrous £44bn hole in the budget. Hence, the OBR’s forecast is crucial here for the Chancellor.

The reason that Reeves will deliver her Budget relatively late in the year on November 26th must be partly to create time for further reforms and investments that she hopes will convince the OBR to at least temper any downgrades. Whilst we await further news here, it is at least heartening to see investment portfolios continuing to make good progress through 2025 and for now the investment teams key themes of defence spend, financials and AI build out continue to perform well. Do have a good weekend.