Zombie companies are strangling the UK economy – and Labour is making it worse, says Tony Blair
The UK economy is being held back by a growing army of zombie companies, firms that barely generate enough revenue to cover their debt interest payments but lack the capacity for real investment or growth.
These unproductive businesses trap capital, labour, and resources that could fuel more dynamic sectors, contributing to stagnant productivity, sluggish wage growth, and an overall lack of economic vitality.
A new report from the Tony Blair Institute, published on Sunday (1 Mar ch), warns that this phenomenon has worsened since the 2008 financial crisis.
Nearly one in ten publicly listed UK firms now qualify as zombies — roughly double the pre-crisis level. The report highlights how reduced “creative destruction”, the process where failing firms exit, and resources shift to more productive ones, has slashed its contribution to productivity growth from 0.7 percentage points annually before the crisis to just 0.1 points afterward.
Job reallocation has slowed dramatically, from 17.4% of the workforce pre-2008 to 13.6% in the 2010s, meaning nearly one million fewer annual job movements. Young firms’ role in economic turnover has halved, and the UK ranks worst among OECD nations for worker-qualification matching, with over a third of workers overqualified – a mismatch costing an estimated 3% of GDP.
The Tony Blair Institute argues that the current Labour government, under Keir Starmer, is aggravating these deep-seated problems rather than addressing them.
Recent policy moves, including higher employer National Insurance contributions, stricter migration controls, expanded employment protections via the Employment Rights Act, and an energy strategy prioritising rapid net-zero transitions over affordability, are raising the costs of hiring, restructuring, and operating.
These changes add friction to an economy that desperately needs greater agility to adapt to technological shifts like AI and global competition.
Pro-growth policies
Tony Blair, the former prime minister and founder of the institute, has long advocated for pro-growth reforms. While the report does not quote him directly in every section, it reflects the institute’s view, aligned with Blair’s emphasis on modernisation and competitiveness, that Labour’s approach prioritises short-term distributional goals over the structural changes required for faster growth.
The report warns that without a policy reset, the UK risks remaining locked in low-dynamism, outdated sectoral structures that have seen almost no labour reallocation between industries contributing to growth in recent decades, the lowest level in nearly a century.
To reverse the trend, the institute proposes a three-pillar plan:
- Labour market reforms: Simplify employment rules (e.g., tiered protections for higher earners over £75,000 and caps on non-compete clauses), expand skilled migration routes like the Global Talent visa, use AI for better job matching, and embed entrepreneurship education in schools.
- Financial system changes: Boost lending backed by intellectual property, extend tax reliefs to intangibles and R&D, modernise bankruptcy processes for faster clean-ups, and ease personal guarantees on loans.
- Regulatory overhaul: Streamline planning with zonal rules and brownfield passports, accelerate AI infrastructure approvals, digitise trade and tax systems, and raise the VAT registration threshold.
The report comes amid broader concerns about UK economic underperformance, with recent data showing persistent weakness in consumer demand, rising corporate distress, and forecasts of potential unemployment spikes in 2026 as some zombie firms finally collapse under pressure from higher costs and interest rates.
