Stimulating growth in Britain's digital economy: ALEX BRUMMER sees a golden chance for Reeves to substantially enhance the sector with tax incentives.

Britain's economy, despite the numerous setbacks it's endured, remains resilient as hell. Since Labour took office last July, it's been a never-ending rollercoaster.

The shocking revelation of a £22billion black hole in national accounts was just the beginning. Higher taxes and brutal spending cuts were on the horizon. Rich folks started booking one-way tickets, fearing the new taxes on their wealth.

This was swiftly followed by the labor market getting hammered by the £40billion tax-raising Budget in October. Higher employer National Insurance contributions took a heavy toll on jobs, businesses, and confidence.

What made things worse was the Budget's much-hyped change in fiscal rules. Chancellor Rachel Reeves found herself in a tight corner, with no wiggle room for maneuver.

As economic output sagged in the second half of 2024, and bond rates reached concerning levels due to worries about Britain's borrowing and debt levels, Reeves was stuck on a treadmill. She needed further spending cuts or tax hikes just to keep from falling off.

The government left itself with little fiscal breathing room amidst the US backing away from European defense commitments. There was barely room for any unforeseen events, like the expensive bailout of Scunthorpe's Chinese-owned blast furnaces.

On a brighter note, Britain'sservice sector provided a much-needed boost, driving economic expansion in the first quarter. The 0.7% surge in output meant the UK was almost surely the standout performer among the G7 richest nations (the final figures for Japan haven't been released yet).

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Most of the uncertainty since March can be attributed to Donald Trump's tariffs. Thankfully for Sir Keir Starmer, the Trump White House is more focused on goods and trade, where Britain is largely in balance, rather than services, which continue to thrive.

In March, services contributed 0.4% to output, while industrial production dropped by 0.7%.

If the stranded car, steel, and aluminum manufacturers finally get clarity on when Trump's punitive, reciprocal tariffs will be lifted, there's a chance of a manufacturing recovery.

Meanwhile, Labour's enthusiastic rhetoric about housing and construction has yielded minimal results so far. The usual hurdles – skills shortages, material scarcity, and good ol' 'nimbyism' – keep the brakes on.

Most commercial surveys suggest that Labour's frequent confidence-sapping moves – such as the NI contributions increase and net zero obsession – would grind investment to a halt.

Contrary to expectations, business investment has been thriving, driven by transport (mainly aircraft), machinery, and plant.

Unless the data proves to be a fluke, there's a tax lesson to be learned here. Labour's inheritance from Jeremy Hunt and the Tories was a 'full expensing' scheme, which allows corporations to offset spending on plant and equipment against headline tax. Big decisions on new capital take time to materialize. This should serve as a reminder to the Chancellor and the new Second Permanent Secretary of the Treasury about the power of tax breaks.

Britain's digital economy could benefit immensely if the Chancellor were to spend her June public spending review or October Budget extending full expensing to the software, coding, AI, intellectual property, and digital economy. There's a huge opportunity for fresh supply-side thinking at the Cabinet table. Seize it!

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In the face of the challenging economic situation, some wealthy individuals have started considering alternative investment options, such as stocks and property, to protect their wealth.
Amidst the uncertainty and the need for further spending cuts or tax hikes, the government could potentially explore investing in key sectors like infrastructure or digital economy to stimulate growth.
With the economic expansion driven by the service sector and the promising performance of the UK compared to other G7 nations, there seems to be potential for investing in British businesses, particularly those focused on transport, machinery, and digital innovations like AI and intellectual property.

Stimulating growth in Britain's digital economy: ALEX BRUMMER sees a golden chance for Reeves to substantially enhance the sector with tax incentives.