Tax hikes send business confidence to two year low

Business confidence among firms in the UK in the services sector, fell to its lowest level in nearly two years following the October Budget, a new survey shows. S&P’s purchasing managers’ index (PMI) for the services sector showed that business expectations for the year ahead were at their lowest level since December 2022.

“This was overwhelmingly linked to worries about higher pay-role costs and subsequent declines in business investment,” the survey said. The fall in business confidence comes shortly after the government hiked employers’ national insurance in the Budget, a move which many business groups argue will hit growth as businesses deal with extra costs.

Economics director at S&P Global Market Intelligence, Tim Moore, noted: “Forthcoming rises in employers’ National Insurance contributions weighed heavily on staff recruitment”.

The overall PMI reading fell to 50.8 in November, down from 52.0 in October and the lowest reading for 13 months.

A research by US investment bank, Goldman Sachs, said that tax hikes introduced by the chancellor, Rachel Reeves, could have a bigger impact on employment and inflation than official estimates suggest. The research is the latest attempt to get to grips with the likely impact of the tax changes. Reeves pushed up the rate of employer national insurance by 1.2 percentage points to 15 per cent, while cutting the threshold at which firms start paying the levy from £9,100 to £5,000.

Forecasts from the Office for Budget Responsibility (OBR) suggested that workers would end up bearing most of the cost of the tax rise through lower real wages, as firms cut wages and increased prices. The fiscal watchdog said the tax hike would end up reducing labour supply by 50,000 average-hours equivalent.

Analysts at Goldman Sachs said it was “reasonable” that most of the tax rise would be past on through lower real wages, but warned that the risks to employment were “skewed to the upside”, meaning that they will be felt more acutely than is currently being predicted.

There has been a record rise in UK businesses in severe financial distress as companies find it “almost impossible to navigate the challenges they face”, according to an insolvency specialist.

The number of businesses showing signs of critical stress rose by 50.2 per cent quarter-on-quarter to 46.853 in the final three months of 2024, Begbies Traynor said. Its “red flag” alerts showed that construction companies were facing the most significant challenges, with 6,830 businesses showing signs of critical distress.

Consumer sectors also reported significant increases in distress, with a jump of 76 per cent in financial distress for the leisure sector and 48 per cent in general retailing. There were a number of high-profile collapses in the sector in 2024, resulting in substantial losses of jobs.

Executive chairman of Begbies Traynor, Ric Traynor, said the figures showed it was “clear that many distressed UK businesses are finding it almost impossible to navigate the challenges they face as we start 2025.” He added: “For many businesses, which were already dealing with weak consumer confidence and higher borrowing costs, the increase in national insurance contributions and the national minimum wage, announced at the last budget, could be the last straw.” The research analysed indicators of financial pressures including county court judgements for non-payment of suppliers and winding-up petitions. Partner at Begbies, Julie Palmer, said: “Across nearly every sector there has been an unprecedented level of growth in the number of firms who are at serious risk of entering insolvency in the next 12 months.” She said that after a disappointing Christmas, consumer-facing industries in particular were feeling the strain. “With many such businesses already operating on thin margins, I fear the current situation will undoubtedly push some over the edge.” (The writer is our foreign correspondent based in the UK)