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Rachel Reeves’ business tax hike is taking its toll on the UK economy as companies scale back hiring, leading to warnings that the Chancellor’s Budget has weakened business confidence at the start of the new year.
Private sector employment The number of people employed fell in December at the fastest pace since January 2021 or, excluding the coronavirus pandemic, since 2009, according to the S&P Global Flash UK Purchasing Managers Employment Index released on Monday.
The index fell to 45.8 from 48.9 in November, well below the level of 50 that would indicate stable headcount.
The figures were the latest in a series of data in recent days showing a fall in hiring, lower business confidence and two consecutive months of contracting GDP, with business groups blaming Reeves’ £25 billion increase in employers’ national insurance contributions in the October budget .
Alex Veitch, director of policy at the British Chambers of Commerce, said companies were “puzzling over how growth will be possible in the face of rising costs”.
“They are trying to absorb the costs but are telling us that this would mean a reduction in investment, cuts in hiring and in some cases layoffs,” he added. “These are decisions that companies didn’t want to face.”
Business concerns come ahead of a Bank of England meeting this week where interest rates are likely to remain stable despite signs of a slowdown Business due to ongoing inflation concerns.
Downing Street insisted that Reeves had to make difficult tax decisions to stabilize public finances and the economy. “The Chancellor has made it clear that difficult decisions are required to restore economic stability,” Number 10 said.
The PMI is an indicator of business sentiment based on the balance between companies reporting improvements and deteriorations, and can exaggerate economic movements when many groups are affected by the same shock. Official data shows that the number of layoffs has not increased in recent months and the number of employees has only decreased slightly.
However, Monday’s figures were consistent with a BoE survey this month that showed most companies expect employment to fall as a result of the measures in the Reeves budget.
They also came as a separate index from trade group Make UK showed that manufacturers’ confidence in the economy fell by the most quarter-on-quarter in the final three months of this year, the most since the pandemic.
Michael Stull, managing director of recruitment firm ManpowerGroup UK, said a “whole range of forces working together” had “crushed optimism” in the economy following Labour’s landslide victory in July.
“The government’s rhetoric has been quite negative. . . That hasn’t helped consumer confidence. When you have all that, you see reduced business investment – it has led to a halt in hiring.”
Of all the options for dealing with higher Social Security payments, including price increases and productivity improvements, “the quickest way is to reduce hiring,” Stull added.
The BCC said businesses that raised the alarm about the impact of the National Insurance increase included an online retailer whose wage costs rose by 10 per cent, or more than £400,000, and which was considering job cuts.
A hospitality company with 500 employees reported that it is scaling back investment and considering redundancies as it prepares for a cost increase of more than £700,000 due to higher National Insurance, a rise 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 to companies hiring fewer workers while reducing the prices would increase.
Average prices at private companies rose at their fastest pace in nine months in December, according to the PMI.
“It is a sharp decline in the employment balance – we should take that seriously,” Wood added. “This is a big deal for the BoE monetary policy committee because it appears that more of the tax increase is being passed on to inflation than thought, and less to wages.”
The MPC will announce its latest decision on Thursday, with markets expecting interest rates to remain unchanged at 4.75 percent.
It has cut borrowing costs twice this year, BoE Governor Andrew Bailey said this month the reaction to higher social security was “the biggest problem” after the budget.
Krishna Guha, an economist at investment banking consultancy Evercore ISI, said Britain had made “significant progress on inflation”, which stood at 2.3 percent in October. “But the underlying trajectory of inflation is still not determined,” he added.
The downward trend in business sentiment does not bode well for year-end economic growth, after the economy contracted by 0.1 percent for the second straight month in October.
The Treasury said: “Our commitment to the economy is resolute. We have capped corporate tax at 25 percent, confirmed full recurring accounting and are committed to working with business to unlock more growth opportunities for our country.”
