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The UK has lost the labour market flexibility that once underpinned growth and needs to rethink policies on tax, immigration and workers’ rights to restore economic dynamism, according to the think-tank set up by former prime minister Sir Tony Blair.
Moves by the Labour government had made the UK economy less agile just as it became essential to adapt to changes driven by the adoption of artificial intelligence, the Tony Blair Institute said in a report published on Sunday that urged ministers to unpick some of its flagship policies.
“Dynamism should be at the heart of the government’s growth strategy,” said Tom Smith, the TBI’s director of economic policy, arguing for reforms that would make it easier for young, expanding companies to raise capital, take risks — and fire staff.
Among other proposals, it said the government should make it easier to dismiss high earners; restrict the use of non-compete clauses that hinder job moves; make increases in the minimum wage contingent on economic conditions; and create new visa routes for low-paid construction and care workers.
The think-tank’s prescription for restoring the UK’s economic dynamism is in stark contrast with the calls by leftwing Labour MPs for Prime Minister Sir Keir Starmer to step up social protection and intervene to support jobs as unemployment rises.
But its proposals echo concerns by business groups and policymakers including the Bank of England’s chief economist Huw Pill that a combination of post-Brexit restrictions and government policies is driving up labour costs and holding back growth.
Many economists say chancellor Rachel Reeves’ decision to raise employers’ national insurance contributions while pushing up minimum wages has led to an increase in UK youth unemployment.
One of the TBI’s proposals is to restore the Low Pay Commission’s authority to slow, pause or reverse increases in the minimum wage if they are damaging jobs. The current policy of holding the main rate at two-thirds of median earnings and seeking to raise youth rates to match was a “risky strategy” against a backdrop of rising unemployment, Smith said.
The TBI also wants the government to reverse recent legislation giving workers earlier protection against unfair dismissal six months into a new job and instead adopt a “tiered” system where high earners could opt out of protection to win better pay.
The cost of axing staff was three times higher in the UK than in the US, Smith argued, and this was “significant if you’re a fast-growing company trying to take a risk on a new venture”.
Other proposals are centred on making it easier for companies to raise capital, including by using the British Business Bank to kick-start lending using intellectual property instead of physical assets as collateral and extending the UK’s capital allowance regime to cover investment in intangible as well as tangible assets.
The TBI also wants to reform the bankruptcy regime, including lenders’ tying of business loans to personal savings and homes, to reduce the costs when entrepreneurs fail.
