Business directors’ confidence in the UK economy has plunged to a record low, with companies unconvinced by Chancellor Rachel Reeves’ growth-focused policies as the impact of last year’s tax hikes continues to bite.
Prime Minister Keir Starmer has repeatedly told MPs that business confidence is at a nine-year high, pointing to a single business survey compiled by Lloyds Bank. But fresh data from the Institute of Directors (IoD), which has around twenty thousand members, suggested UK firms were less optimistic about both the economy’s prospects and their own organisations.
A survey of directors at 639 businesses showed that the net balance for pessimism deepened by 19 percentage points in July compared to the previous month.
Confidence in business prospects also slipped into negative territory after more positive data in June, marking the second-lowest reading for leaders’ confidence in their own organisations since the indicators were introduced in mid-2016.
Export expectations likewise turned negative, despite the UK’s recent trade deals with the United States and the European Union, which had briefly lifted business sentiment the previous month. Firms also flagged concerns about higher costs squeezing profit margins. More worryingly for the UK jobs market, an increasing number of companies expressed pessimism about headcount expectations.
IoD chief economist Anna Leach said UK business leaders were grappling with immediate cost increases introduced by Rachel Reeves’ £20bn tax raid on employment last autumn, while improvements on rules and funding had been “slower.”
“Last year, damaging speculation around tax rises in the lead-up to the 2024 Budget caused many companies to pause investment and hiring decisions, contributing to six months of near-zero economic growth,” Leach said.
“We are now living with the economic consequences of those tax hikes, even as uncertainty around future costs once again builds. With ripple effects through the economy from tax changes and signs of consumer retrenchment, many firms report struggling to plan amid a cacophony of risk.”
Leach added: “The government must urgently quash rumours of further tax rises for business this autumn, and accelerate planning reforms and deregulation to restore confidence and drive growth.”
A separate IoD survey, which drew nearly 900 responses, suggested that just nine per cent of business owners believed government policy so far would succeed in driving growth. The top area in which businesses wanted to see “government action” was taxation, specifically reducing employment costs and slashing red tape.
The latest IoD findings contrast with more upbeat readings from Lloyds Bank, which many economists view as an outlier. Lloyds’ research primarily reflects sentiment among businesses with turnover above £250,000.
Another business indicator suggested negative sentiment has now persisted for 10 months, underlining that UK firms remain unconvinced by the government’s industrial strategy and deregulation package announced under the “Leeds Reform” at a summit in Leeds on July 15.
Leeds, a major financial services hub, was chosen as the venue to unveil reforms designed to modernise capital markets, cut red tape, and broaden access to investment in a bid to boost growth. A key element of the reforms involves deregulating certain areas of the financial sector to make it easier for businesses to operate.
Shadow business secretary Andrew Griffith said the gloomy IoD results were no surprise, arguing that Labour had “spent the last year attacking private enterprise with the zeal of a left-wing student union.”
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