Reeves’ tax raids crush business confidence – but worst is yet to come
Business confidence plummeted in the three months to May as Rachel Reeves’ tax hikes took hold and firms have warned more pain is to come.
Consumer services’ optimism marked its eight consecutive month of decline at -42 per cent, whilst levels of business value plunged to -56 per cent. This was down from -44 per cent in February.
Meanwhile, average selling prices hit 32 per cent – over double of its long-run average of 14 per cent.
In business and professional services, optimism sank to -43 per cent, compared to -28 per cent in February, according to CBI’s Sector Services Survey.
The survey gathers responses from 215 firms and uses percentage indicators to reveal business trends in key areas like costs, sales, and hiring.
Alpesh Paleja, deputy chief economist at CBI, said: “Businesses continue to cite the impact of higher employer NICs and the National Living Wage both hitting their own cost base and depressing demand from clients.”
Respondents sounded the alarm on the dire state ahead, with business and professional services expecting profitability to fall to -47 per cent in the next three months. For the three months to May, it was -34 per cent.
Consumer services expect to further trim their headcount, with numbers employed dropping to -36 per cent for the next three months.
The Chancellor upped employer’s national insurance contributions 1.2 per cent to 15 per cent, with the changes coming into effect in April. The national living wage was increased to £12.21 from £11.44.
With employment costs having increased, sentiment regarding employment across the sector fell to -28 per cent, as more firms trimmed their headcount.
Double blow of rising costs and prices
Paleja said: “It’s been a tough first half of the year for the services sector. The double whammy of both cost and price pressures ramping up is particularly worrying, given the Bank of England’s concern about the persistence of domestic inflationary pressures.”
Inflation jumped to 3.5 per cent in April, as the cost burden of budget burdens weighed on businesses.
Consumer price inflation increased 1.2 per cent on a month-on-month basis, higher than its last monthly peak in October 2022.
Reeves will deliver her Spending Review and Industrial Strategy on June 11, where she will be tasked with balancing the competing priorities of economic growth and public service expenditure, whilst attempting to follow her “iron clad” fiscal rules.
Paleja said it was crucial the government used review to “unlock growth enablers”.
She called for “making it easier to invest in skills and taking measures to reduce the regulatory burden on business – to boost business confidence, giving firms the right incentives to invest and grow.”