Rachel Reeves faces a major test of credibility after investment in British manufacturing collapsed, in what industry figures describe as a clear sign that Labour’s economic policies are sapping business confidence.
Figures from Make UK show that spending on machinery and equipment, the backbone of Britain’s industrial base, has plunged from a 10-year high last year. Investment intensity fell sharply from 8.1% to 6.8%, signalling that manufacturers are pulling back amid growing unease over the Chancellor’s tax plans.
The figures present an awkward backdrop for the Chancellor just weeks before her second Budget. Critics say the slump reflects mounting unease over Labour’s tax and spending plans, as well as doubts about the government’s commitment to creating a stable, pro-business environment.
Make UK described the situation as a “critical juncture” for British industry, warning that “frequent changes to tax policy” have damaged confidence and deterred investment. The group said billions of pounds in vital spending are now being postponed, threatening to choke off growth just as the government claims to be rebuilding the economy.
Fhaheen Khan, Senior Economist at Make UK, said:
“It’s clear that we’re at a critical juncture for investment, and there is a real sense of urgency. The forthcoming Budget must not only safeguard current incentives but refine them with a set of carefully targeted measures to focus on boosting the take up of accelerating technologies and innovation.”
“Furthermore, the statement should end the frequent tax changes to incentives we have seen in recent years by committing to a business tax regime which is set in stone for the lifetime of this Parliament.”
The fall in investment has exposed tensions within Labour’s economic strategy, which seeks to combine fiscal restraint with promises of industrial renewal. Reeves is grappling with a reported 30 billion pound shortfall in the public finances, and there is growing speculation that she may resort to stealth taxes or cuts to investment incentives to plug the gap.
While Labour has pledged not to raise income tax, national insurance, or VAT, manufacturers fear the Chancellor could target more obscure business taxes or scale back reliefs such as capital allowances and R&D credits.
Mike Thornton, Head of Manufacturing at RSM UK, warned:
“UK manufacturers remain optimistic, but to allow them to transform, invest and drive future prosperity they need a helping hand from the government, not more taxes.”
Make UK said the sector was facing an “uncompetitive business environment”, burdened by rising energy costs, business rates, and tax increases introduced under previous governments but left unchanged by Labour.
Industrial strategy fails to reassure
Reeves has made Labour’s industrial strategy central to her economic pitch, promising to cut energy costs and reduce bureaucracy. But business leaders say warm words have yet to translate into concrete action. While Make UK said around a third of firms are increasing investment in energy and AI projects, most remain hesitant amid uncertainty over long-term policy direction.
Manufacturing accounts for around 9% of the UK economy, but recent data show the sector shrinking at its fastest rate in five months, underscoring the fragility of the recovery.
Pressure from the City
At the same time, pressure is mounting from the financial sector. The City of London Corporation has called on Reeves to scrap the bank levy and surcharge, which raised 1.8 billion pounds last year, arguing that the taxes are driving investment overseas.
Chris Hayward, the Corporation’s policy chairman, said the government must send the “right signals to wealth creators” and urged the Treasury to abolish stamp duty on share trading to revive the London market.
With her Budget due on November 26, Reeves faces a daunting task: to convince businesses that Labour can be trusted to foster growth rather than stifle it through higher taxes and policy uncertainty.
