British Prime Minister Keir Starmer is set to face a significant challenge this month as he meets with international investors in a bid to boost economic growth and reverse the perception of
national decline. On October 14, Starmer will host executives from major global banks, energy firms, and multinational companies, seeking to position Britain as a more attractive investment destination amidst political turbulence in France, Germany, and the United States.
However, the new prime minister faces lingering questions about how he plans to address the issues that have troubled previous governments. Although Starmer’s Labour Party secured a decisive victory in July’s general election, years of Brexit-related political instability still cast a shadow over investor confidence.
The near-collapse of Thames Water, a key utility company, has further unsettled investors. Britain’s privatised water industry has faced harsh criticism for polluting rivers with untreated sewage, with accusations that profit has been prioritized over environmental protection. Thames Water's current investors blame regulators for restricting price increases, which they argue are essential to fund necessary infrastructure upgrades.
Luke Hickmore, an investment director at abrdn, a creditor to Thames Water, voiced concerns about the broader investment climate in the UK. "We're speaking with international investors, and there’s significant nervousness about the UK, primarily due to regulatory uncertainty," Hickmore said.
The UK faces a monumental task of attracting tens of billions of pounds annually to upgrade infrastructure, as Starmer has pledged to double economic growth and generate the tax revenue needed to improve public services. However, the UK cannot compete with the substantial subsidies offered by the United States and eurozone countries for the net-zero transition.
Days after the July election, finance minister Rachel Reeves outlined a plan to remove barriers to infrastructure and housing development. Yet, specific details remain scarce, and the government has yet to appoint an investment minister.
Raoul Ruparel, director of the Boston Consulting Group's Centre for Growth, acknowledged that the new government has recognized some of the challenges but emphasized that it is still early days. "There are a lot of unanswered questions," Ruparel said, noting that issues such as low private investment returns, complex contracts, high labor and energy costs, and skills shortages continue to hinder growth.
The UK has long struggled with under-investment, ranking 28th out of 31 OECD countries in terms of business investment as a percentage of national income in 2022, according to the Institute for Public Policy Research.
Despite these challenges, government officials point to recent investment announcements, including a £10 billion investment by private equity firm Blackstone in an AI data center and an £8 billion planned investment by Amazon, as signs of progress.
Investor Concerns Linger
However, investor concerns remain. Britain has lost its status as Europe’s top destination for foreign direct investment to France, according to accountancy firm EY. Although the UK led in new projects in 2023, a survey by consultants Alvarez & Marsal showed that the UK was the only major European economy viewed negatively in terms of infrastructure attractiveness, largely due to regulatory issues.
A London-based consultant, speaking anonymously, criticized the government’s handling of regulation, stating: “The UK hasn’t seized the opportunity for clear, predictable regulation.”
Hickmore from abrdn warned of a "perfect storm" of rising interest rates, regulatory challenges, and government change, which he believes is deterring investors at a crucial moment.
Starmer’s government has responded to public anger over environmental issues by proposing tougher regulations for water companies, including potential limits on executive pay. Investors are also awaiting the government’s tax policy, which Reeves will unveil in her first budget on October 30. There are hints of higher taxes for the wealthy, leaving some businesses wary. A recent survey indicated that many companies are delaying expansion plans until after the budget.
Looking further ahead, the government’s spending review next spring will provide a clearer picture of its infrastructure investment plans for energy, transport, and other sectors, potentially offering a foundation for private sector investment.
Ruparel noted that investors are hoping for a shift away from the UK’s recent focus on meeting short-term budget rules at the expense of longer-term economic strategy. "Businesses understand the need for fiscal responsibility but are looking for strategic clarity about the government’s investment priorities," he said.
While Reeves has hinted at this shift in her upcoming budget, some investors remain concerned that the government’s bleak messaging about the economy it inherited from the previous Conservative administration could signal future tax hikes.
Peter Arnold, EY’s chief UK economist, cautioned that tax increases, particularly on capital gains, could undermine efforts to boost investment. "Those measures might be counterproductive to the government’s broader goals," Arnold said. Photo by Prime Minister’s Office, Wikimedia commons.