The conflict in the Middle East is continuing to place increasing pressures on the UK economy – at a time of already fragile growth and elevated cost pressures. Even if a resolution to the conflict is reached, its economic effects are likely to persist beyond any formal end. Businesses across the UK are already grappling with sustained pressures – from elevated energy costs to ongoing disruption in global supply chains – that will take time to unwind.
Against this backdrop, the government’s response will be critical. The CBI has welcomed the Chancellor’s commitment to a measured and targeted approach. But with geopolitical uncertainty high and inflationary pressures re-emerging, the priority must be clear: support growth by tackling the cost of doing business and delivering on long-term commitments.
A compounding shock to an already fragile economy
The current crisis is not happening in isolation. Even before the conflict, firms were grappling with weak demand, rising labour costs and structurally high energy prices. Profitability was under pressure, and investment intentions remained subdued.
The conflict has intensified these existing challenges.
Energy and fuel costs have risen sharply, with electricity prices up by as much as 30% and gas bills increasing significantly for some firms. At the same time, supply chain disruption – driven by shipping delays, rising freight costs and higher insurance premiums – is adding further strain.
These pressures are being felt across the economy:
- Energy intensives industries, including steel, chemicals and manufacturing are seeing sharp increases in input costs
- Logistics firms are facing significant fuel price rises, squeezing already tight margins
- Consumer-facing sectors, including retail, hospitality and leisure are facing rising energy and inputs costs against a backdrop of weak demand and high price sensitivity
- SMEs are experiencing growing cash flow pressures as costs rise and revenues are delayed.
The result is a broad-based increase in the cost of doing business – risking further pressure on investment, jobs and ultimately household finances.
The key message: reduce the cost of doing business and deliver long-term commitments
The conflict has acted as a force multiplier, exposing and accelerating long-standing structural challenges in the UK economy. Businesses are being asked to absorb rising costs while continuing to invest and support growth – but their capacity to do so is increasingly constrained.
If government wants firms to play their full role in supporting the economy and easing cost of living pressures, it must focus on reducing the cost of doing business.
That means targeted, practical interventions that improve competitiveness, boost confidence and unlock investment.
Six priorities to support business
In this context, the CBI has identified six priority areas where progress ahead of the Autumn Budget would make a meaningful difference:
Tackle business energy costs: Energy remains one of the most significant cost pressures facing firms. The government has taken welcome steps to ensure more firms are positioned to benefit from the British Industrial Competitiveness Scheme (BICS). Now the focus must be on broader solutions to tackle the UK’s structurally uncompetitive non-domestic energy costs – including moving policy levies on business electricity bills into general taxation and providing support to help businesses deploy electrification technologies.
Progress tax system reform: Greater clarity and stability in the tax system would support investment. Priorities should include introducing a permanent replacement for the Energy Profits Levy, delaying the scheduled rise in fuel duty, delivering the CBI’s ‘slab to slice’ business rates system, and the government confirming its position on the tax treatment of capital allowances.
Align the UK’s Carbon Border Adjustment Mechanism (CBAM): Ensuring alignment with the EU system wherever possible will minimise administrative burdens and avoid unnecessary costs for firms trading across borders. Refineries should be included within the UK’s CBAM.
Unlock private investment at scale: Clear government signals can crowd in private capital and support long term growth. Priorities should include publishing the Defence Investment Plan, approving the Rosebank and Jackdaw projects, the government demonstrating a willingness to use a broader suite of public private partnership financing models to support the UK’s infrastructure needs, and publishing the Hydrogen Strategy.
Take a pragmatic approach to employment rights reform: Engaging with business to find workable solutions on employment regulation will help manage labour cost pressures while maintaining flexibility and fairness. This should include committing to further tripartite discussions on:
- The introduction of the right to guaranteed hours and the right to reasonable notice and short notice payments
- The introduction of restricted variations – or the so called ‘fire and rehire’ protections
- Reform of the right to request flexible working
- Removal of the compensation caps for unfair dismissal.
Cut regulatory red tape: Streamlining regulation and reducing duplication will lower compliance costs and free up resources for investment, while maintaining high standards. The government should work with the CBI on our environmental regulation policy sprint and avoid regulatory overreach by:
- Working closely with industry to mitigate the impacts of the proposed Nutrient Profiling Model and refraining from changes to high fat, sugar or salt (HFSS) advertising and promotion rules for at least five years
- Streamlining corporate reporting requirements where appropriate to free up capital for productive and innovative investment
- Encouraging regulators to use the CMA as a benchmark for best practice, adopting a model similar to the 4Ps framework to ensure regulation is proportionate, predictable, delivered at pace, and fosters investor confidence through regulatory processes.
