Higher business taxes take toll on UK economy as companies cut back hiring

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Rachel Reeves’ increase in business taxes is taking its toll on the UK economy as companies cut back hiring, adding to warnings that the chancellor’s Budget has sapped corporate confidence heading into the new year.

Private sector employment in December fell at the fastest pace since January 2021 or, if the coronavirus pandemic is excluded, 2009, according to the S&P Global flash UK purchasing managers’ employment index published 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 stable headcount.

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

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

“They are looking to absorb the costs but tell us that will mean scaling back investment, cutting recruitment and, in some cases, making redundancies,” he added. “These are choices firms didn’t want to be facing.”

Businesses’ concerns come ahead of a Bank of England meeting this week where interest rates are likely to be held steady despite signs of a weakening economy because of continued inflation worries. 

Downing Street insisted Reeves had had to take tough choices on tax to stabilise the 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 deteriorations, and can exaggerate moves in the economy when many groups are hit by the same shock. Official data shows that redundancies have not risen in recent months and the number of payrolled employees has fallen only slightly.

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

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

Michael Stull, managing director of recruitment company ManpowerGroup UK, said “a whole bunch of forces pushing together” had “popped the optimism” business felt after Labour’s landslide election victory in July.

“The rhetoric coming out of [the] government was fairly negative . . . that didn’t help consumer confidence. When you have all that, you see lower business investment — it stalled hiring.”

Of all the options to manage higher national insurance contributions, including price increases and productivity improvements, “the fastest path is to reduce hiring”, Stull added.

The BCC said businesses that had raised the alarm with it over the impact of the national insurance rise included an online retailer that was facing an increase of 10 per cent, or more than £400,000, in its wage bill and considering job cuts. 

A hospitality company with 500 staff reported that it was cutting back on investment and considering redundancies as it braced itself for an increase in costs of more than £700,000 owing 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 pointed to the national insurance rise being a “stagflationary” tax that would lead to companies hiring fewer workers while increasing prices.

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

“It’s a sharp decline in the employment balance — we should take that seriously,” Wood added. “It is a big deal for the [BoE] Monetary Policy Committee because it appears more of the tax hike is passed to inflation than they thought, and less to wages.” 

The MPC is due to announce its latest decision on Thursday, with markets expecting interest rates to remain unchanged at 4.75 per cent.

It has cut the cost of borrowing twice this year, with BoE governor Andrew Bailey saying this month that the response to higher national insurance was “the biggest issue” after the Budget.

Krishna Guha, 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 underlying inflation trajectory is still not locked down,” he added.

The downward trend in business sentiment bodes ill for economic growth at the end of the year after the economy shrank by 0.1 per cent for the second consecutive month in October. 

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