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Rachel Reeves’ business tax hike is damaging the UK economy as firms cut back on hiring, adding to warnings that the Chancellor’s Budget has dented firms’ confidence going into the new year .
Private sector hire workers 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 released on Monday.
The index fell to 45.8, down from 48.9 in November and well below the 50 level indicating stable headcount.
The figures are the latest in a series of data in recent days showing a decline in hiring, lower business confidence and a two-month decline in GDP, with business groups Business blamed Reeves’ £25 billion increase in employer national insurance contributions in the October Budget.
Alex Veitch, director of policy at the British Chambers of Commerce, said businesses were left “scratching their heads to see what growth will look like as costs rise”.
He added: “They are looking to reduce costs but tell us that will mean scaling back investment, cutting recruitment and in some cases creating redundancies ”. “These are choices that companies do not want to face.”
Businesses’ concerns come ahead of this week’s Bank of England meeting, where interest rates are likely to be held steady despite signs of weakness. economy because of concerns about continued inflation.
Downing Street insisted Reeves had to make difficult tax choices to stabilize public finances and the economy. “The Prime Minister has been clear that tough decisions are 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 downturns, and can magnify fluctuations in the economy as more groups are affected by the impact of the crisis. similar shock. Official data shows redundancies have not increased in recent months and the number of paid staff has only fallen slightly.
But Monday’s figures are in line with a BoE survey this month that found most businesses expected employment to fall as a result of measures in Reeves’ Budget.
They also came as a separate index from trade group Make UK showed manufacturers’ confidence in the economy fell at its strongest quarterly rate since the pandemic in the final three months of the year. now.
Michael Stull, managing director of recruitment firm ManpowerGroup UK, said “a whole bunch of forces coming together” had “destroyed the optimism” businesses felt after the landslide election victory. Labor Party election in July.
“Rhetoric comes from [the] The government is quite negative. . . That hasn’t helped consumer confidence. When you have all that, you see lower business investment – hiring stagnates.”
Of all the options for managing higher national insurance contributions, including raising prices and improving productivity, “the fastest route is to reduce recruitment”, Stull added.
The BCC said businesses that have issued warnings about the impact of national insurance increases include an online retailer which is facing a 10% increase, or more than £400,000, in money bills salaries and are considering job cuts.
A hospitality company with 500 staff reports that it is cutting investment and reviewing redundancies as it prepares for cost increases of more than £700,000 due to higher national insurance, minimum wage increases and replacement costs. business rates change, BCC added.
Rob Wood, UK chief economist at consultancy Pantheon Macro Economics, said the PMI figures showed that the National Insurance increase was an “inflation-stopping” tax that would lead to firms hiring less. more workers while prices increase.
The average price charged by private-sector companies in December rose at the fastest pace in nine months, according to PMI.
“It’s a sharp decline in the employment balance – we should be taking that seriously,” Wood added. “It’s a big deal for [BoE] Monetary Policy Committee because it appears that more of the tax increase is going to inflation than they thought and less to wages.”
The MPC will announce its latest decision on Thursday, with the market expecting interest rates to remain unchanged at 4.75%.
It has cut borrowing costs twice this year, with BoE governor Andrew Bailey saying this month that response to higher national insurance is the “biggest problem” after the Budget.
Krishna Guha, economist at investment banking consultancy Evercore ISI, said the UK had made “significant progress on inflation”, at 2.3% in October. He added : “However, the underlying inflation trajectory remains unconstrained.”
The downtrend in business sentiment bodes poorly for economic growth at the end of the year after the economy contracted 0.1% for the second consecutive month in October.
“Our business commitment is resolute,” the Treasury said. We have capped corporate tax at 25%, made spending permanent and committed to working with business to unlock more growth opportunities for our country.”
