Higher business taxes affect the UK economy as companies reduce hiring

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Rachel Reeves’ increase in business taxes is weighing on the UK economy as businesses cut hiring, adding to warnings that the Chancellor’s Budget has sapped business confidence heading into the new year.

Private sector employment December fell at the fastest pace since January 2021 or, if the coronavirus pandemic is excluded, 2009, according to the UK Purchasing Managers Employment Index released Monday by the Standard & Poor’s Global Flash Index.

The index fell to 45.8, down from 48.9 in November, and well below the reading of 50 that indicates stable headcounts.

The figures were the latest in a series of data in recent days showing a decline in employment, falling business confidence and two straight months of GDP contraction, with business groups blaming a £25bn rise in employers’ National Insurance contributions in the Budget. October.

Alex Fitch, policy director at the British Chambers of Commerce, said businesses were left “scrambling to see how growth will be possible in the face of rising costs”.

He added: “They are looking to absorb costs, but they tell us that will mean reducing investment, reducing hiring, and in some cases laying off workers.” “These are choices that companies didn’t want to face.”

Business concerns come ahead of the Bank of England’s meeting this week where interest rates are likely to remain steady despite signs of weakness. economy Due to persistent fears of inflation.

Downing Street insisted Reeves had to make tough choices on taxation to stabilize public finances and the economy. No 10 said: “The Chancellor has been clear about the need to make difficult decisions to restore economic stability.”

The PMI is an indicator of business sentiment, based on the balance between companies reporting improvement and deterioration, and can exaggerate movements in the economy when many groups are exposed to the same shock. Official data show that layoffs have not increased in recent months, and the number of employees receiving salaries has decreased only slightly.

But Monday’s figures were in line with a Bank of England survey this month which showed most businesses expected a fall in hiring as a result of measures in Reeves’ Budget.

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

Michael Stoll, managing director of recruitment firm ManpowerGroup UK, said a “whole range of forces coming together” had “sparked the optimism” felt by Labor after Labour’s landslide election victory in July.

“The rhetoric from (the government) has been fairly negative. . . This did not help consumer confidence. When you have all that, you see reduced investment in the business – resulting in hiring halting.

Stoll added that of all the options for managing higher National Insurance contributions, including rate increases and improving productivity, “the quickest route is to reduce employment.”

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

A 500-staff hospitality company said it was scaling back investment and considering redundancies, as it braced for a cost increase of more than £700,000 due to National Insurance hikes, 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 suggest the National Insurance hike is a “stagflationary” tax that would lead to companies hiring fewer workers as prices rise.

Average prices charged by private sector firms rose at the fastest pace in nine months in December, according to the Purchasing Managers’ Index.

“It’s a sharp decline in the balance of employment – we have to take that seriously,” Wood added. “It’s a big deal for the Monetary Policy Committee (BoE) because it appears that more of the tax increase has been transferred to inflation than they thought, and to a lesser extent to wages.”

The Monetary Policy Committee is scheduled 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 borrowing twice this year, Bank of England Governor Andrew Bailey said this month Responding to the National Insurance hike The “biggest problem” was after the budget.

The UK has made “significant progress on inflation”, which reached 2.3 per cent in October, said Krishna Guha, an economist at investment banking consultancy Evercore ISI. “But the path of core inflation has not yet been closed,” he added.

A downward trend in business sentiment does not bode badly for year-end economic growth after the economy contracted by 0.1 percent for the second straight month in October.

The Treasury said: “Our commitment to business is firm. We have capped corporate tax at 25 per cent, confirmed full standing expenditures, and are committed to working with businesses to unlock more growth opportunities for our country.