Further job cuts needed to cope with tax raid, businesses warn
Businesses across Britain are planning another round of job cuts to deal with the pain of Rachel Reeves’ national insurance raid, laying bare the scale of the financial pressure wrought by the government’s £20bn tax hike after it came into effect in April.
As many as one in three businesses said they were planning to shed staff despite having already cut headcounts, according to research conducted by accountancy firm S&W, with many firms claiming they were planning hiring freezes and reducing hours worked by staff.
More than half of UK firms were cutting staff numbers in response to Reeves’ raid, in which the rate of employers’ national insurance contributions (NICs) was raised to 15 per cent along with a cut in the salary threshold to £5,000 at last year’s Autumn Budget.
The vast majority of businesses who took part in a survey of 500 owners also suggested that they were planning to hike prices, in signs inflation pressures were mounting.
The fresh survey figures come in a week where the Office for National Statistics (ONS) is set to reveal price growth data for May and the Bank of England is expected to hold interest rates, with the painful impact of NICs on the UK economy set to run for some time longer.
Six in ten firms were developing technology and increasing the use of automation to replace humans, S&W found, underscoring the race to use tech to slash labour costs and likely contributing to a decline in job vacancies.
Firms’ concerns over a skills gap and increased labour costs look set to undermine government ambitions to back British workers as “difficult decisions” will have to be made, according to S&W partner Claire Burden.
“Given that salaries represent a considerable proportion of the overall cost base for most businesses, it is to be expected that many are looking closely at headcounts in response to the increased national insurance costs,” Burden said.
Tax begets tax
A rise in unemployment and subdued business confidence as a result of NICs could leave Reeves scrambling to balance the books after splurging £190bn more on public services.
A drop in employment levels and weaker growth in the second quarter of the year could push borrowing higher, Deutsche Bank warned ahead of other data on the public purse to be released by the ONS this week.
A recent report by HSBC also said the UK risks falling into a “doom loop” for tax policies as gilt yields remain high.
The risks of higher borrowing costs and lower tax receipts come against the backdrop of the Chancellor’s commitment to increasing capital expenditure as part of a ten-year plan to build more affordable homes, transport links and other infrastructure that could boost productivity.
The limits on growth caused by Reeves’ tax hikes are putting economists and investors on stand-by for higher taxes if fiscal rules remain “non-negotiable”, despite suggestions by the IMF that they could be refined to prevent emergency measures being taken.
One such tax hike reportedly being considered – and previously endorsed by deputy prime minister Angela Rayner – would see the top rate of tax on dividends rise beyond 39 per cent.
The surcharge tax on banks could also be raised to five per cent but leading City analysts and industry groups, including UK Finance chief David Postings, said the added cost risked making domestic banks less competitive than those in New York and European capitals.