Rising corporation taxes weigh heavily on UK economy as businesses cut hiring

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Rachel Reeves’ business tax rise is taking a toll on the UK economy, with businesses cutting back on hiring, adding to warnings that the Chancellor’s Budget has undermined business confidence ahead of the new year.

Private sector employment fell in December at its fastest rate since January 2021 or, excluding the coronavirus pandemic, 2009, according to Britain’s Flash Purchasing Managers’ Employment Index. S&P Global released Monday.

The index fell to 45.8, from 48.9 in November, and well below the value of 50 which would indicate a stable workforce.

The figures are the latest in a series of data in recent days showing a decline in hiring, a drop in business confidence and two consecutive months of contraction in GDP, with business groups blaming Reeves for a 25 billion pounds employers’ social security contributions in the October budget.

Alex Veitch, director of policy at the British Chamber of Commerce, said businesses were “banging their heads to see how growth would be possible in the face of rising costs”.

“They are looking to absorb costs, but are telling us that this will mean reduced investment, reduced hiring and, in some cases, layoffs,” he added. “These are choices that companies did not want to be faced with. »

Business concerns come ahead of this week’s Bank of England meeting, where interest rates are expected to remain steady despite signs the economy is weakening due to ongoing inflation concerns.

Downing Street insisted Reeves had to make tough tax choices to stabilize public finances and the economy. “The Chancellor has made it clear that difficult decisions are needed to restore economic stability,” Number 10 said.

The PMI is a business climate indicator, based on the balance between companies reporting improvements and deteriorations, 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 has only fallen slightly.

But Monday’s figures were in line with a BoE survey this month, which showed most businesses expected employment to fall following the Reeves budget measures.

They were also released as a separate index from trade group Make UK showed manufacturers’ confidence in the economy fell at the highest quarterly rate since the pandemic in the last three months of this year.

Michael Stull, chief executive of recruitment firm ManpowerGroup UK, said “a whole group of forces coming together” had “shattered the optimism” felt by the business community after Labor’s landslide victory in July’s election .

“The government’s speech was rather negative. . . it has not improved consumer confidence. When you have all of this, you see a decline in business investment – it has stalled hiring.

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

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

A 500-staff hotel firm has said it is cutting investment and considering redundancies as it prepares for a cost increase of more than £700,000 due to higher national insurance, an increase in minimum wage and changes to professional rates, the BCC added.

Rob Wood, chief UK economist at consultancy Pantheon Macronomics, said the PMI figures indicated the national insurance hike was a “stagflationary” tax that would lead businesses to hire fewer workers while raising prices .

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

“This is a big drop in the employment balance – we should take this seriously,” Wood added. “This is a big problem for the (BoE) Monetary Policy Committee because it appears that more of the tax rise is being passed on to inflation than they thought, and less to wages .”

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

It has cut the cost of its borrowing twice this year, with BoE Governor Andrew Bailey saying this month that responding to the national insurance increase was “the biggest problem” after the budget.

Krishna Guha, an economist at investment banking consultancy Evercore ISI, said the UK had made “significant progress on inflation”, which stood at 2.3% in October. “But the path of underlying inflation is still not locked in,” he added.

The downward trend in business sentiment bodes poorly for economic growth at the end of the year, after the economy shrank 0.1 percent for the second consecutive month in October.

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