Higher business taxes hit UK economy as companies cut hiring

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Rachel Reeves’s corporate tax rise is taking its toll on the UK economy as firms reduce hiring, adding to warnings that the Chancellor’s Budget has undermined business confidence ahead of the new anus.

Private sector employment fell in December at the fastest pace since January 2021 or, if the coronavirus pandemic is excluded, since 2009, according to S&P Global’s UK Purchasing Managers Employment Flash Index released on Monday.

The index fell to 45.8, down from 48.9 in November, and well below the reading of 50 that would point to a stable workforce.

The figures were the latest in a series of data in recent days showing a decline in hiring, lower corporate confidence and two straight months of GDP contraction, with business groups blaming a £25 billion rise in Reeves on employers’ national insurance contributions in the October Budget.

Alex Veitch, policy director at the British Chamber of Commerce, said businesses had been left “scratching their heads at how growth will be possible in the face of rising costs”.

“They are trying to absorb the costs, but we are told that will mean reducing investment, cutting hiring and, in some cases, layoffs,” he added. “These are options that companies did not want to face.”

Business concerns come ahead of a Bank of England meeting this week, where interest rates are likely to remain steady despite signs of a weakening economy due to continued concerns about inflation.

Downing Street insisted Reeves had had to make difficult fiscal decisions to stabilize public finances and the economy. “The chancellor has been clear that difficult decisions were needed to restore economic stability,” Number 10 said.

The PMI is an indicator of business sentiment, based on the balance between companies reporting improvements and declines, and can exaggerate movements in the economy when many groups are affected by the same shock. Official data shows that layoffs have not increased in recent months and the number of employees on the payroll has decreased only slightly.

But Monday’s figures were in line with a Bank of England survey this month which showed most businesses expect a fall in employment as a result of the Reeves Budget measures.

They also came as a separate index from trade group Make UK showed manufacturers’ confidence in the economy fell at the steepest quarter-on-quarter rate since the pandemic in the final three months of this year.

Michael Stull, managing director of recruitment firm ManpowerGroup UK, said “a lot of united forces” had “destroyed the optimism” businesses felt following Labour’s landslide election victory in July.

“The rhetoric that came out of the government was quite negative. . . That didn’t help consumer confidence. “When you have all that, you see less business investment – ​​hiring stopped.”

Of all the options for managing higher national insurance contributions, including price increases and productivity improvements, “the quickest route is to reduce hiring,” Stull added.

The BCC said companies that had raised the alarm about the impact of the national insurance rise included an online retailer that was facing a 10 per cent rise, or more than £400,000, in its wage bill and was considering cuts of employment.

A hospitality company with 500 employees reported it was cutting investment and considering redundancies as it prepared for a cost rise of more than £700,000 due to a national insurance rise, an increase in the minimum wage and changes to business rates, the BCC added. .

Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, said the PMI figures suggested the national insurance increase was a “stagflationary” tax that would lead businesses to hire fewer workers and raise prices.

Average prices charged by private sector companies rose in December at the fastest pace in nine months, according to the PMI.

“It’s a sharp drop in the employment balance; we should take that seriously,” Wood added. “It’s a big problem for the (Bank of England) Monetary Policy Committee because it appears that more of the tax increase is being passed on to inflation than they thought, and less to wages.”

The MPC is due to announce its latest decision on Thursday, and markets expect interest rates to remain unchanged at 4.75 percent.

It has cut the cost of borrowing twice this year, and Bank of England governor Andrew Bailey said this month that the response to higher national insurance was “the biggest problem” after the Budget.

Krishna Guha, an economist at investment banking advisory firm Evercore ISI, said the UK had made “significant progress on inflation”, which stood at 2.3 per cent in October. “But the trajectory of core inflation is not yet blocked,” he added.

The downward trend in business confidence bodes poorly for economic growth later in the year after the economy contracted 0.1 percent for the second straight month in October.

The Treasury said: “Our commitment to business is resolute. “We have capped corporation tax at 25 per cent, confirmed full permanent spending and are committed to working alongside businesses to unlock more growth opportunities for our country.”