1. Economic situation

1.1 Economic commentary

The economic situation, both in the UK and worldwide, has deteriorated following the Russian invasion of Ukraine. In addition to the human cost of the war, the International Monetary Fund (IMF) said it was causing disruption in commodity markets, leading to higher inflation and slower growth. As a result, it reduced its forecast for global economic growth for 2022 from 4.4% to 3.6%. The IMF also argued that in many countries the costs of the coronavirus pandemic meant that there was now limited scope to use fiscal policies to alleviate the issues caused by the war, for example by reducing taxes on energy.

In the UK, the Deputy Governor of the Bank of England, Jon Cunliffe, said that the invasion of Ukraine was the third economic shock to the economy over the last two years, following Brexit and the coronavirus pandemic. Mr Cunliffe commented that, even prior to the war, the UK had had very high inflation due to supply constraints and energy price increases resulting from the “rapid reopening” of the global economy. He said the conflict would “intensify and prolong” the surge in inflation.

Commentators have also pointed to weak data on retail sales, consumer confidence and sentiment amongst firms as evidence of “storm clouds” gathering over the UK economy. One survey of consumer confidence fell close to its lowest level since it began in 1974, while it has been argued that the challenges faced by businesses “far eclipse” Brexit and the pandemic. As a result, some economists have warned that the UK could fall into a recession.

The increases in prices, particularly in energy, have led to concerns about a “cost of living crisis” for UK households. In March 2022, the Office for Budget Responsibility (OBR) said that higher inflation would cause living standards to fall by 2.2% in 2022/23, their largest fall in any financial year since records began in 1956/57. As the graph below shows, the most recent data on inflation suggests it has risen to rates not seen since the early 1990s. In May 2022, the Bank of England predicted that inflation would rise to over 10% in the fourth quarter of 2022.

UK inflation, January 1989 to March 2022: annual % change in the consumer price index (CPI)

Source: Office for National Statistics, ‘CPI annual rate: all items: series D7G7’, 13 April 2022

Increases in inflation and policy responses to it (such as higher interest rates) also have direct impacts on the cost of interest payments on the government’s debt. The OBR said that government debt interest payments were expected to be £83bn in 2022/23: £30bn more than 2021/22 and a 36-year high as a percentage of GDP (3.3%).

A more detailed commentary a range of economic indicators including growth, the labour market and the public finances can be found in the Library’s briefing on the March 2022 spring statement.

1.2 Economic policy responses

In the 2022 spring statement the Government said the economy was “in a strong position” to meet the challenges described above. It pointed to a strong labour market, improved public finances and the positive impact of the Covid-19 vaccine rollout on economic activity. The Government also listed a range of policies it had introduced to help with the cost of living, including:

  • an “energy bills rebate” package, including a one-off council tax rebate for homes in bands A to D and an up-front discount of £200 in energy bills in 2022, repayable in five annual £40 instalments from 2023;
  • more generous provisions in the welfare benefit universal credit;
  • increasing the threshold at which national insurance contributions start to be paid;
  • a temporary cut in fuel duty of 5p per litre;
  • increasing the household support fund by £500m; and
  • increasing the national living wage.

In response to the spring statement, the Shadow Chancellor, Rachel Reeves, said that the Government did not understand the scale of the “cost of living crisis”. She called for additional measures such as a windfall tax on oil and gas producers and scrapping the health and care levy. On 27 April 2022, the Telegraph reported that the Chancellor of the Exchequer, Rishi Sunak, could consider a windfall tax on energy companies if companies did not invest sufficiently in securing UK energy supplies.

Considering monetary policy, Jon Cunliffe described the difficulties for the Bank of England of setting policy in the current environment. He said that one risk was tightening policy (for example, by raising interest rates) too far, which could choke off the recovery and lead inflation to fall below its 2% target rate. On the other hand, Mr Cunliffe stated there was a risk of not tightening policy enough. He suggested this could lead to permanently higher inflation and wage growth as businesses and workers increased their expectations of future price increases. To date, the Bank of England has raised its official interest rate from a historic low of 0.1% during the pandemic to 1.0%.

2. Possible legislation: employment and workers’ rights

The December 2019 Queen’s Speech contained commitments to introduce an employment bill. The Government said this would “enhance workers’ rights, supporting flexible working, extending unpaid carers’ entitlement to leave and ensure workers keep their hard-earned tips”. No such was bill was introduced in the 2019–21 session. In March 2021, the Secretary of State for Business, Energy and Industrial Strategy, Kwasi Kwarteng, said that the Government did intend to bring forward an employment bill “when parliamentary time allows”. However, it did not appear in the May 2021 Queen’s Speech.

It has been reported that an employment bill is also unlikely to feature in the 2022 Queen’s Speech. Nevertheless, the Government has announced a number of individual measures that it said would require legislation, either separately or as part of a larger bill. On 6 April 2022, when asked when the Government intended to introduce an employment bill, the Parliamentary Under Secretary of State at the Department for Business, Energy and Industrial Strategy, Lord Callanan, said that there were “a number of different vehicles” to take forward such measures.

Commitments in the area include:

On 27 April 2022, the Financial Times reported that legislation on flexible working and a single enforcement body for employment rights would not feature in the Queen’s Speech.

3. Possible legislation: financial services regulatory reforms

A Financial Services Bill—now the Financial Services Act 2021—was introduced in the 2019–21 session and received royal assent on 29 April 2021. It contained a range of measures, including some related to Brexit following the end of the transition period and some aimed at making other improvements to the regulatory framework. At the time, the Government said the bill was “an important first step”, but that a “more fundamental” review of financial services regulation was ongoing. More recently, in January 2022, the Government described how it intended to use the freedoms deriving from Brexit to implement “an ambitious programme of reform” to make financial services regulation “work better” for the UK.

This section summarises a number of reforms that have been highlighted as areas for possible legislation either individually, or within a wider financial services bill.

3.1 Insurance capital requirements

In February 2022, the Government announced reforms to the ‘solvency II’ rules that govern capital requirements for insurance companies. It said there would be a government consultation in April 2022 and a “technical” consultation by the Prudential Regulation Authority later in 2022. These consultations follow an earlier ‘call for evidence’ on solvency II, to which the Government responded in July 2021.

3.2 Insolvency arrangements for insurers

The Government has also consulted on reforms to insolvency arrangements for insurers. The response, published in April 2022, said the Government would continue to consult with relevant bodies and would legislate for reforms “when parliamentary time allows”.

3.3 Access to cash

In the March 2020 budget, the Government stated it would legislate to “protect access to cash and ensure that the UK’s cash infrastructure is sustainable in the long-term”. In 2021, the Government consulted on issues relating to access to cash, such as ensuring “reasonable access” to deposit and withdrawal facilities. It has not yet published a response. On 26 April 2022, in answer to a written question, the Government said it will “set out next steps in due course”. (For more information on the issue, see a House of Commons Library briefing of March 2022.)

3.4 Regulatory regime for wholesale markets

Currently, the UK’s regulatory regime for wholesale financial markets operates under provisions set by the Markets in Financial Instruments Directive (MiFID), which was taken into UK statute as retained EU law at the end of the Brexit transition period. In 2021, the Government consulted on reforms to the regime.

The Government published its response on 1 March 2022. It proposed reforms that it said would create a “simpler and less prescriptive” regime now that the UK has left the EU, while maintaining or improving regulatory outcomes. For example, it promised to remove restrictions on firms’ ability to execute transactions and reduce the instruments that are subject to enhanced transparency requirements.

3.5 Credit unions

In the March 2020 budget, the Government said that it would bring forward legislation allowing credit unions to offer a wider range of products and services. This was reiterated in a financial inclusion report of December 2021.

3.6 Regulation of stablecoins and cryptoassets

In April 2022, following a consultation in 2021, the Government stated that it intended to legislate to bring certain ‘stablecoins’ within the scope of regulation. Stablecoins are a form of cryptoasset, which is a secure, digital currency or representation of value. The characteristic feature of a stablecoin is that it has a mechanism designed to stabilise its value, such as being backed by a regular currency, a commodity such as gold or a different cryptoasset. In this respect they differ from other forms of cryptoasset, such as bitcoin, which is not backed and which the Government described as “more akin to a form of investment”.

The Government said the design of stablecoins meant they have the potential to develop into a widespread means of payment and that this possible ‘mainstream’ role could bring risks to financial stability and consumer protection.

A separate consultation on financial promotions for cryptoassets such as bitcoin concluded that regulations to reduce consumer risks would be introduced through secondary legislation.

3.7 Open finance and smart data

‘Open finance’ is a term for allowing consumers and businesses to share their financial data with companies that offer innovative products and services. The Financial Conduct Authority (FCA) described it as an extension of ‘open banking’, whereby customers share their account information. The FCA stated this has resulted in services such as account aggregation, financial advice, accountancy, credit rating services and charitable donations, meaning that open banking has been a “success”. It issued a ‘call for input’ on the wider possibilities of open finance in December 2019 and published a feedback statement in March 2021.

The Government has also consulted in the area of ‘smart data’, publishing a response in September 2020. This also envisages increased data sharing and better availability of data but in a wider range of sectors than just finance; for example, in energy markets. It said the Government would introduce primary legislation to mandate participation in smart data initiatives when time allows. More recently, in September 2021 the Government also consulted on wider reforms to the UK’s data protection regime. It has not yet published a response.

4. Possible legislation: other areas affecting the economy and business

4.1 Reforming competition and consumer policy

In 2021, the Government consulted on proposals to reform competition policy and consumer rights. It argued that reforms would promote “strong free markets, vigorous competition and high consumer standards”. Proposals included:

  • Further enhancements to the powers of the Competition and Markets Authority (CMA), including greater control over proposed mergers and stronger enforcement against anti-competitive conduct.
  • Updating consumer rights to keep pace with market developments, such as tackling subscription traps, improving online shopping, and providing stronger prepayment protections.
  • Strengthening the enforcement of consumer laws; for example, by supporting individuals to resolve their own disputes, strengthening state enforcement powers and delivering better guidance and support for businesses to comply with their obligations.

The feedback statement, published on 20 April 2022, concluded there was a “huge appetite for reform” amongst respondents to the consultation. The Government said that “many reforms require legislation to implement. Government will identify the appropriate legislative vehicle or vehicles as parliamentary time and priorities allow”.

Separately, the Government has committed to introducing legislation on digital competition and regulation. The Government stated that its aims are to promote competition and innovation in digital markets, to protect consumers and businesses from unfair practices. It also proposes to place the Digital Markets Unit on a statutory footing, giving it powers to enforce the regime. (Further information on the background to this proposed legislation can be found in the Library’s briefing for the digital, culture, media and sport section of the Queen’s Speech briefing.)

4.2 Audit and corporate reporting reform

In February 2022, the Financial Times reported that the Government was preparing to introduce legislation to reform the audit profession in the UK. This followed a consultation in 2021 and several prior reviews. Reforms proposed in the 2021 consultation included: creating a new audit profession overseen by a new regulator; proposals to break up the dominance of the ‘big four’ audit firms; and additional corporate reporting, for example on businesses’ resilience to risk.

The Government has not yet published a response to the consultation. On 27 April 2022, the Financial Times suggested that legislation in this area will not feature in the Queen’s Speech.

4.3 Insolvency regulation reform

In December 2021, the Government consulted on reforms to insolvency regulation. Proposals included a move to a single regulator from the existing four ‘recognised professional bodies’. Other changes included a public register of insolvency practitioners and a compensation scheme. The consultation stated that the proposed reforms to the regulatory framework would require new primary legislation, to be implemented when parliamentary time allows.

The consultation closed on 25 March 2021. The Government has not yet published a response.

4.4 Prospectus regime

On 3 March 2022, the Government announced reforms to the ‘prospectus regime’. This governs the documents firms must publish when they seek admission to a stock market or raise fresh capital. The proposals follow a review by Lord Hill of Oareford (Conservative) that reported in March 2021.

The Government said its proposals would simplify the regulation of prospectuses without lowering regulatory standards. It argued this would improve the quality of information investors receive, promote wider participation in the ownership of public companies and provide for a more “agile and dynamic” approach.

4.5 Establishing the infrastructure bank

In the March 2021 budget, the Government set out details of the new national infrastructure bank. It said the bank would “partner with the private sector and local government to increase infrastructure investment to help tackle climate change and promote economic growth”. In a more detailed description of the bank’s mandate and design, the Government said it would bring forward legislation to put the bank on a statutory footing “as soon as the Parliamentary timetable allows”.

4.6 Thomas Cook compensation

In the 2019 Queen’s Speech, the Government committed to introducing a bill to allow the state to compensate customers of the failed travel firm Thomas Cook who have personal injury claims.

In October 2021, the Government said that an “alternative route” for Thomas Cook personal injury claimants was being pursued. It stated that legislation would be introduced if no alternative route was available.

5. Possible legislation covered in other sections of the Library’s briefing

The following possible bills are covered in other areas of the House of Lords Library’s briefing for the Queen’s Speech, though they may also be relevant for the economy and business.

Cover image by Adeolu Eletu from Unsplash.