UK businesses expect lower margins and higher prices after Budget, BoE says

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Most UK businesses expect reduced profit margins, higher prices and lower employment as a result of the rise in employer national insurance contributions, according to a Bank of England survey.

Fifty-nine per cent of companies said lower profits were likely because of the increase from April, announced in the Budget, according to the Decision Maker Panel in November, a monthly survey of chief financial officers.

Moreover, 54 per cent of groups expected to raise their prices, while the same proportion predicted employment would fall. About 38 per cent of businesses expected to pay lower wages than they otherwise would have done.

Rob Wood, economist at the consultancy Pantheon Macroeconomics, said: “With lower wage growth the least common response, it seems likely that more of the payroll tax hike will feed into inflation than the Monetary Policy Committee and the Office for Budget Responsibility assumed.”

Businesses said they planned to raise prices by 3.8 per cent on average over the next year, up from 3.6 per cent in October and the highest since May.

They expected consumer inflation to be 2.8 per cent in the year ahead, up from the 2.5 per cent forecast in October.

In an interview with the Financial Times on Wednesday, Bank of England governor Andrew Bailey warned that the response to the national insurance change was “the biggest issue” after the Budget.

“How companies balance the mixture of prices, wages, the level of employment, what is taken on margin, is an important judgment for us,” he said.

For the first time since June 2021, businesses expected stronger price growth in the year ahead than they had experienced in the past year.

“Overall, the NIC rise will therefore act as a stagflation shock, leading to some price rises, while lowering employment,” said Tomasz Wieladek, chief European economist at T Rowe Price.

Chancellor Rachel Reeves announced in October that the rate of employer national insurance would rise from 13.8 per cent to 15 per cent, with employers starting to pay the tax from salaries of £5,000 a year, instead of the previous threshold of £9,100.

The measure was not in Labour’s election manifesto, with many arguing that it breached the party’s pledge to not increase taxes on working people.