Exclusive: Industry chiefs warn Reeves not to hit business after income tax U-turn
The Chancellor must not rely on businesses to plug the gaping fiscal gap left by Thursday’s income tax U-turn, a group of industry body chiefs has warned a year after UK firms were forced to stomach much of the £40bn of tax hikes at Labour’s maiden Budget.
In an unusual combined intervention, bosses from five of the UK’s largest business lobby groups told Rachel Reeves that any attempt to plug the widening fiscal shortfall with levies on business would be the “wrong choice” and see rock-bottom business confidence levels plumb new depths.
Tina McKenzie, policy chair of the Federation of Small Businesses, told Morning Wire that the months of leaks and briefings were “taking a toll” on business owners, and that the group’s members were “not the answer to a revenue shortfall”.
“One week we hear firm statements that something is definitely on the way, the next we’re told with the same certainty that it’s not,” she said, adding: “Enough is enough. Small firms are not cash cows to be milked whenever the Treasury runs dry. At the Budget, the Chancellor must make clear there are no further tax raids on the people keeping the country working.”
UK Hospitality chair Kate Nicholls joined the calls, warning Reeves not to row back from previous commitments to cut business rates on high-street firms in a bid to make the Treasury’s sums in the wake of the income tax U-turn.
“The economy and businesses cannot take any more cost increases,” she said. “There must be no U-turns from the Chancellor on existing pledges to cut hospitality business taxes. It is imperative that permanently lower business rates for hospitality are delivered in the forthcoming Budget.”
The stark warnings follow a dramatic volte face from ministers on previously telegraphed plans to raise the basic and higher rates of income tax to meet a fiscal shortfall that economists estimate to be roughly £35bn.
Rachel Reeves had heavily intoned that she would plough ahead with a manifesto-busting 2p hike to income tax instead of pursuing dozens of separate levies and carve-outs to stay within her fiscal rules.
But in a decision first reported by the Financial Times on Thursday night, officials have now shelved those plans, in a move that sparked a sell-off in sterling and UK government bonds.
The decision has set off a fresh round of speculation as to which taxes the Chancellor will be forced to raise in lieu of the income tax rise, which on its own would have gone a long way towards plugging the fiscal black hole. Economists had also estimated rumours that the Treasury was planning to combine the 2p hike with an equal cut to employee National Insurance contributions would raise £6bn.
Shevaun Haviland, the director general of the British Chambers of Commerce (BCC), told Morning Wire a third of firms have made people redundant or are considering it in recent months, and that this month’s intervention must be one that “backs business and delivers growth”.
“We’re clear that a further increase in the tax burden on firms is the wrong choice.” she added.
Helen Dickinson, the chief executive of the British Retail Consortium, said: “Retailers were hit disproportionately hard by last year’s Budget, with £7bn of additional costs this year as a result of changes to employer National Insurance.”
She added: “The consequence of further tax rises on the industry will be to amplify these effects – meaning more job losses and higher shop prices for households.”
A string of dire business confidence surveys have shown that many bosses are still reeling from the Chancellor’s shock decision to announce a 1.3 per cent rise to Employer National Insurance contributions at last year’s Budget. The move, which was accompanied by a near-halving of the threshold at which the levy kicks in and an above-inflation living wage rise, added roughly £25bn to the tax bills of UK firms.
Economists, business leaders and the Bank of England have all previously said the move forced bosses to pare back hiring plans, introduce redundancy rounds and raise prices, feeding into official inflation.
The FSB’s McKenzie added: “Small firms are not the answer to a revenue shortfall. Targeting them to plug a gap would hit growth and jobs, depress revenues in the long run and leave us back here again next year when the books do not balance.”
Anna Leach, chief economist at the Institute of Directors, said: “In some ways it is perfectly normal for these policy choices to move up and down the scorecard rankings in the run-up to a Budget being locked down.
“But the public airing of the Treasury’s workings is deeply damaging to business confidence and the ability of business leaders to plan and invest.”
A spokeswoman for the Treasury said: “We do not comment on speculation around changes to tax outside of fiscal events. The Chancellor will deliver a Budget that takes the fair choices to build strong foundations to secure Britain’s future.”