If it takes two to tango, dealmakers have a dance partner with two left feet in the UK government.

Business-friendly moves across merger review, regulatory oversight, planning, the relationship with the EU and capital markets reforms have been persistently undermined by national insurance rises and Chancellor Rachel Reeves’ minuscule fiscal headroom.

UK dealmaking in 1H25 has not benefited from this backdrop – aggregate deal values fell 32% year-on-year (YoY) to GBP 69.9bn, with the deal count down 11% YoY, according to Mergermarket data. This as the wider EMEA deal value haul climbed 2.3% YoY to USD 430.5bn (GBP 318bn). The FTSE 250 index – tracking more UK-focused businesses than its loftier FTSE 100 cousin – is up 4.84% year-to-date, outstripped by the Euro Stoxx 600, up 8.34% YTD.

The UK government’s Janus-faced approach has been on full display in recent days.

Labour’s administration has been buffeted this week by suggestions it may seek to impose a wealth tax on fortunes of more than GBP 10m, after former party leader and European Commissioner Lord Kinnock flew a kite in a weekend interview. This led to a scratchy denial of any plans to pursue such a levy at the UK government’s lobby briefing to political reporters on Monday, kicking off feverish speculation that it could be in the mix of revenue raising options at the autumn Budget.

Yet efforts by the government to target economic growth – and incentivise dealmaking – via regulatory reform continue to bear fruit.

This morning (10 July), Daniel Křetínský’s EP Group – which completed its GBP 4.1bn takeover of Royal Mail owner International Distribution Services (IDS) last month – will have been delighted with UK communications regulator Ofcom signing off on reforms easing the postal businesses’ universal service obligation (USO). The changes allow the delivery of second class letters on alternate weekdays and lower delivery targets across first and second class mail. Royal Mail parent International Distribution Services’ (IDS) CEO Martin Seidenberg has welcomed the decision, arguing it “supports the delivery of a reliable, efficient and financially sustainable universal service”.

The IDS takeover was reviewed by the Cabinet Office’s Investment Screening Unit under the National Security and Investment Act, with Business and Trade Secretary Jonathan Reynolds also involved in discussions across EP Group’s commitments to the USO.

Though an independent regulator, Ofcom received a letter from Reeves in December 2024 asking for details on how the agency is supporting economic growth. Ofcom CEO Dame Melanie Dawes and Chair Lord Grade replied in January 2025, noting their plan to “put Royal Mail’s universal service obligation for postal services onto a more sustainable footing”, adding they “would be very happy to share further details” with the chancellor across its growth plans.

This should be seen in tandem with Reynolds’ growth-focused strategic steer to the Competition and Markets Authority (CMA), which aligned with the agency’s own pursuit of what it dubs the “4Ps” of “pace, predictability, proportionality and process” in undertaking merger reviews.

Speaking at the Mergermarket M&A Forum UK 2025 last week, the CMA’s senior director of mergers Sorcha O’Carroll noted the agency’s unconditional approval of the GBP 3.6bn insurance tie-up between Direct Line and Aviva 10 days before deadline reflected its efforts to speed up Phase I approvals. She also pointed to the process leading to conditional approval of the GBP 960m Wincanton/GXO logistics deal as an example of smooth running under a new Phase II regime – something that GXO’s own chief legal officer Karlis Kirsis attested to on the same panel.

Alongside these moves, the government is consulting on a planning reform working paper aimed at tearing up barriers to building across Britain. At her Mansion House speech next week, Reeves is expected to announce proposals aimed at funnelling substantial retail savings into UK equities via tax-free ISA accounts. Last month, the FCA finalised its PISCES rules, providing an innovative framework for “private IPOs” and delivering on a commitment Reeves had made in November 2024.

On trade, it has scored a win with agreed proposals to reset the trading relationship between the UK and the European Union, and mitigated the impact of US President Donald Trump’s tariffs agenda via a quickfire deal struck last month. These are real achievements.

But they are being undermined by the government’s fiscal approach.

Out of the bunker

Following the July 2024 general election, Labour ministers “went into a bunker” for six months, creating a chilling effect in the UK business community, one veteran London dealmaker told Mergermarket.

During this period, Reeves crafted her first infamous Budget – noted chiefly for its hike in employer national insurance contributions and dampening impact on business sentiment.

Since the new year, however, ministers have emerged to be a lot more engaged with the business community and the regulatory easing has been noted, the banker said.

Against this backdrop, although M&A has been depressed, sentiment has been buoyed by a striking number of competitive processes in the public markets, he added. The battle between a KKR-led consortium and strategic bidder PHP for London-listed NHS landlord Assura has been an entertaining tussle, with PHP nudging its nose ahead with a GBP 1.8bn cash and shares offer dangling future upside potential to current shareholders. KKR was more fortunate in its GBP 4.1bn pursuit of specialist instruments player Spectris, with its bid seeing off Advent and representing a 96% premium to the undisturbed share price.

The “fly in the ointment” for a sustained post-summer UK M&A revival is the autumn Budget, the dealmaker conceded.

As the non-partisan Institute for Fiscal Studies noted at the time of Reeves’ Spring Statement in March, her GBP 9.9bn fiscal headroom against the target to balance the current budget creates ongoing “uncertainty around policy”. Tax increases are widely tipped – but Labour committed not to raise income tax, employee national insurance or VAT in its election manifesto. All three are the most credible revenue raisers in a chancellor’s arsenal.

When employer national insurance contributions were raised in October 2024, “if you’d put in an offer for a retail or hospitality business, you were screwed”, the banker said. Despite predicting a “catch-up” boom of deals in late 3Q25 and into 4Q25, “you have to get through October before employer or domestic tax-sensitive sectors are investible” from a deal perspective, he argued.

Reeves undoubtedly has a fiscal headache and the argument for broad-based tax rises is arguably compelling, not only so the government can meet its public services objectives but also to end speculation about further hikes for the rest of the parliament.

All governments are reluctant to react to fiscal policy suggestions, fearing the appearance of giving a running commentary on the budget process. It is perhaps understandable that officials have been slow out of the blocks to categorically dismiss Lord Kinnock’s wealth tax idea.

Yet no proposal could fly more in the face of the government’s regulatory agenda and efforts to revitalise entrepreneurs’ animal spirits to hike dealmaking and deepen capital markets.

Without clarity of purpose, Labour risks the positive progress on its growth agenda coming to naught.