Higher business taxes are damaging the UK economy as companies cut back on hiring

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Rachel Reeves’ rise in business taxes is damaging the UK economy as companies cut back on hiring, adding to warnings that the Chancellor’s Budget has dampened business confidence in the new year.

Private sector work in December fell at the fastest pace since January 2021 or, if the coronavirus outbreak is excluded, 2009, according to the S&P Global flash UK executive jobs index published on Monday.

This index fell to 45.8, from 48.9 in November, and below the figure of 50 that would indicate a stable number of articles.

The figures were the latest in a string of data in recent days that showed a slowdown in hiring, low business confidence and two consecutive months of contracting GDP, with business groups blaming Reeves ‘ a £25bn increase in employers’ national insurance contributions in the October Budget.

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

He added: “They want to accept the cost, but they tell us that it will reduce investment, reduce hiring, and in some cases, reduce employment. “These are options that companies did not have. want to face them.”

Business worries come ahead of a Bank of England meeting this week where interest rates are likely to be held steady despite signs of easing. the economy due to ongoing inflationary concerns.

Downing Street stressed that Reeves had to make tough decisions on taxation to stabilize public finances and the economy. “The Chancellor was clear that tough decisions were needed to restore economic stability,” said Number 10.

The PMI is an indicator of business sentiment, based on the balance between companies reporting improvement and deterioration, and can exaggerate economic movements when many groups are affected by the same shock. Official data shows that layoffs have not risen in recent months and the number of paid workers has fallen only slightly.

But Monday’s figures were in line with a BoE survey this month which showed many businesses expected a fall in jobs as a result of Reeves’ Budget measures.

They also come as a separate index from business group Make UK showed manufacturers’ confidence in the economy has fallen at a quarter-on-quarter rate since the pandemic in the last three months of this year.

Michael Stull, chief executive of recruitment company ManpowerGroup UK, said “a number of converging forces” had “boosted confidence” for business after Labour’s landslide election victory in July.

“The statement from (the government) was really bad. . . that did not help consumer confidence. When you have all of these, you see less investment in the business – it has stopped hiring. ”

Among all the options to control the high contributions of the national insurance, including the increase of the price and the improvement of production, “the fastest way is to reduce the hiring”, Stull added.

The BCC said businesses which had also raised the alarm over the impact of the rise in national insurance included an online retailer who was facing a 10 per cent increase, or more than £400,000, in his salary and consider downsizing.

A hospitality company with 500 employees reported it was cutting back on investment and considering job cuts as it braces for more than £700,000 in costs due to higher national insurance, to a rise in the minimum wage and changes in business rates. BCC added.

Rob Wood, chief UK economist at consultancy Pantheon Macroeconomics, said the PMI figures showed that a rise in national insurance as a “stagflationary” tax would lead to companies hiring fewer workers while they are increasing the prices.

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

“It’s a huge drop in employment rates – we need to take it seriously,” Wood added. “It’s a big issue for the Monetary Policy Committee (BoE) because it looks like more tax increases are being passed on to inflation than they thought, and wages are lower.”

The MPC is due to 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 response to higher national insurance it was the “biggest issue” after the Budget.

Krishna Guha, an economist at banking consultancy Evercore ISI, said the UK had made “significant progress in terms of inflation”, which stood at 2.3 percent in October. He added: “But the main trend of inflation is still not closed.”

The drop in business sentiment points to an economic slowdown at the end of the year after the economy shrank by 0.1 percent for the second consecutive month in October.

The Department of Finance said: “Our commitment to business is firm. We’ve cut the corporate tax by 25 percent, we’ve guaranteed full spending, and we’re committed to working with business to create more growth opportunities for our country.”