This week’s briefing takes a particular focus on the UK economy, with a spotlight on today’s pivotal Bank of England rates decision and a fresh update on the state of the UK’s public finances, bringing both together to give a clearer picture.
We’ll also explore fresh manufacturing data to assess how this vital sector is performing and where industry sentiment may be heading.
Finally, with a rising number of individuals now paying dividend tax, we take a closer look at the outlook for those vulnerable to this increasingly significant area of taxation.
Read on for crucial insights that could shape the investment landscape ahead.
The Bank of England has decided to cut interest rates in response to a broad range of domestic economic indicators and international pressures. With unemployment rising, inflation edging upward, and GDP growth slowing, a 0.25% cut was widely seen as the most likely adjustment.
Some have understandably questioned how lowering rates helps address inflation. The key lies in understanding what’s driving inflation right now. Unlike during the post-Covid period — when rate hikes were used to cool demand-led inflation — today’s inflation is not primarily being driven by increased consumer demand. Instead, the data points to rising employment costs and higher energy prices as the main contributors. These cost pressures force businesses to raise prices simply to remain viable.
Many have drawn comparisons to the recent Covid-era economic conditions and policy responses, but those playbooks don’t apply. The focus must be on the data behind the inflation, not just the inflation headline itself.
In response, the Bank has opted to lower rates to stimulate economic activity, and further cuts may follow, though nothing has been confirmed. While this may be a step in the right direction, it doesn’t directly address deeper structural challenges. Broader government policy, especially in relation to energy costs and business support, remains a much more influential factor in determining the UK’s long-term economic trajectory. Andrew Bailey suggests that there is good reason to believe energy prices won't continue to be an issue.
One big question many have raised is: why has this series of 5 rate cuts not boosted the economy?
Well, as we saw in last week's briefing, a key economic factor has been the very high rate of savings in the economy - essentially, consumers don’t feel confident enough to spend.
So, although this rate cut marks a key moment for monetary policy, attention remains firmly on how the government responds to persistent global challenges and domestic economic pressures.
While the Bank of England has taken steps to stimulate the economy through rate cuts, attention is rapidly shifting to the fiscal side — and the picture is equally, if not more, concerning. According to a stark warning from the National Institute of Economic and Social Research (NIESR), the government now faces a fresh £50bn shortfall in the public finances.
The respected think tank, co-founded by John Maynard Keynes and used by institutions like the Treasury and IMF, now believes Reeves must raise taxes or cut spending by £51.1bn to restore the fiscal "headroom" her government had last year. “It is becoming increasingly difficult to see how the Government meets its fiscal targets, sticks to spending promises, and avoids tax increases on working people. Something will have to give,” said David Aikman, NIESR’s director.
Critics of Labour argue that the current black hole is a result of poor economic decisions since taking office, pointing to a cycle of rising taxes, falling growth and weakening business confidence. Shadow chancellor Mel Stride claimed: “Businesses are closing, unemployment is up, inflation has doubled, and the economy is shrinking. And Labour are refusing to rule out more damaging tax rises on investment.”
These sentiments are echoed by business groups warning that any further fiscal tightening, particularly on employers, could deepen the UK's economic malaise. Helen Dickinson of the British Retail Consortium warned that higher taxes would “fan the flames of inflation.”
Yet options are limited. NIESR believes a rise in taxes is the only viable solution under Reeves’s current fiscal rules. Stephen Millard, the think tank’s deputy director, suggested that tinkering at the margins won’t cut it: “You would need to raise taxes a chunk now… Otherwise, is a promise about something you are going to do in four years’ time credible?” He noted that raising £50bn would be equivalent to a 5% rise in both the basic and higher rates of income tax — a politically explosive move, but one of the few with enough weight to close the gap.
Unsurprisingly, calls for alternative solutions have gained traction. Labour backbenchers and unions are pushing hard for a wealth tax, arguing that it would be both fairer and more effective than squeezing working people. “A wealth tax of 2% on assets over £10m could raise £24bn a year,” said Richard Burgon MP, citing the doubling of billionaire wealth since 2010. Unison’s Jon Richards added that a new levy on gambling or an online sales tax could also play a role.
Despite these suggestions, the risk of damaging confidence and investment remains high. Some critics warn that a hasty tax grab could repeat past mistakes, particularly after Labour’s previous £40bn tax hike, which many say damaged business sentiment and failed to produce the intended fiscal stability.
The Chancellor faces a narrowing set of choices and rising pressure to act decisively in her upcoming Budget.
The number of UK investors paying dividend tax is expected to more than double in just four years, rising from 1.8 million in 2021–22 to over 3.7 million in the current tax year. This surge follows a series of successive cuts to the tax-free dividend allowance by both Conservative and Labour-led governments.
The allowance, once set at £5,000 in 2017, now stands at just £500, meaning that even more modest investors are being caught in the tax net. Adding to the burden, frozen income tax thresholds are pushing more individuals into higher tax bands, which means dividend income is being taxed at higher rates.
With growing speculation that Chancellor Rachel Reeves may target dividends further in the upcoming autumn Budget, potentially scrapping the £500 allowance entirely, investors and business owners will be increasingly wary.
The UK manufacturing sector showed tentative signs of stabilisation at the start of Q3, with the PMI rising to 48.0 in July, its highest level in six months. While still below the 50.0 threshold that marks expansion, the data suggests the rate of contraction is slowing.
However, the sector continues to face significant domestic and global headwinds. Weak client demand, policy uncertainty, and cost pressures have weighed heavily on sentiment. Manufacturers report lower new business and export orders, citing Brexit-related admin issues, global tariff concerns, and weak overseas demand, particularly from North America, Europe, India, and China.
Manufacturers highlighted the impact of minimum wage increases and employer National Insurance contributions, both of which have tightened margins. At the same time, backlogs of work and stock levels have fallen, suggesting that reduced demand continues to ripple across operations.
Some subsectors are faring better than others. Consumer and intermediate goods production returned to modest growth, while investment goods output declined at a faster rate. Although some cost pressures- such as shipping and supplier prices - remain, overall, input and selling price inflation stayed relatively stable in July. This marginal improvement hasn’t been enough to spur investment, as many firms still cite skills shortages and uncertainty as barriers to growth.
“The UK manufacturing sector is starting to send some tentatively encouraging signals... but it is clear that there is no assured path back to strong growth,” said Rob Dobson of S&P Global Market Intelligence.
This week’s update presents a UK economy caught in some challenging conditions. While the Bank of England’s influence may be limited in the current climate, the recent rate cut appears to be a step in the right direction. Meaningful progress will almost certainly depend on coordinated government policy.
As Andrew Bailey highlighted, one of the key drivers of both inflation and unemployment — high energy costs — shows little sign of easing, and the government's response over the coming months will be critical.
This challenge is particularly pronounced in the manufacturing sector, where energy can account for over 10% of operating expenses, compared to a broader business average of around 5%. Still, despite these headwinds, both growth and sentiment appear to be edging back toward positive territory, an encouraging sign for industry and those impacted by its wider ripple effects.
Turning to the ever-present topic of taxation, this week’s data revealed a rise in the number of individuals paying dividend tax on profits—a tax that is unlikely to fall, and may even rise further, should the government choose to lean on it in the next Budget. It seems investing with tax efficiency in mind will increasingly form a key part of the picture for investors seeking to protect and grow their capital.
And that Budget will almost certainly be the key focus for investors, business owners, and economists alike. Until then, we’ll continue to monitor and share the key developments that shape our investment landscape.