Tax hikes dragging investment to worst level since pandemic, CBI says
Chancellor Rachel Reeves’ dramatic tax hike on employment has helped push firms’ investment plans down to the worst level in five years, contributing to a downgrade in the Confederation of British Industry (CBI)’s latest economic outlook.
The CBI now believe that the UK economy will only grow 1.2 per cent this year and slow down to a mere one per cent growth in 2026, which are both downgrades on forecasts released last December.
The industry body’s new report said business investment will slow down in the third quarter of the year and even drop at the beginning of next year.
Early data released by the Office for National Statistics (ONS) this year showed an increase of 5.9 per cent at the beginning of this year as firms rushed to buy aircraft and ICT equipment.
CBI economists said underlying investment plans “remain poor” and the low spirits would begin to show in official data later this year.
The damage of higher NICs on the UK jobs market is set to restrain household consumption despite inflation easing and interest rates predicted to be cut to 3.5 per cent by the middle of next year.
Tax pressures add to instability
The Office for Budget Responsibility (OBR) risks a revision of productivity forecasts if CBI projections come to light, with lower capital spending among firms set to keep levels below pre-Covid levels.
The fiscal watchdog has consistently overestimated the UK’s post-2020 recovery in growth, with its latest fiscal outlook report warning that a continuation of recent trends would see output come in 3.2 per cent lower than estimated and subsequently leave a black hole in public finances by 2030 measured at 1.4 per cent of GDP.
The CBI believes productivity is unlikely to recover in the short term, posing a risk to Reeves’ chances of maintaining her fiscal buffer worth £9.9bn.
Shadow Chancellor Mel Stride said the CBI’s report proved Labour’s taxes were “killing growth”.
“The ‘Spend Today, Tax Tomorrow’ Chancellor, Rachel Reeves told the CBI that she is ‘not coming back with more borrowing or more taxes’ – but she has boxed herself into a corner and we know she now has a ‘secret plan to raise taxes’,” he said.
“Make no mistake – more taxes are coming.”
A Treasury spokesperson said recent spending commitments outlined last week showed the government was “investing in Britain’s renewal”.
“The Spending Review set out how we’ll deliver jobs and growth – including plans to improve city region transport, a record investment in affordable homes and funding Sizewell C.
“We have also secured deals with the EU, US and India to help lower costs for businesses and we have stabilised the public finances helping interest rates to fall four times since July.”
CBI chief economist Louise Hellem suggested the unpredictability of global tensions around conflict and trade added to the sense of gloom brought by higher employment costs incurred by UK companies, making it more important that the government “pulls all the levers it can” at supporting businesses.
“The Spending Review signalled a down payment on hardwiring the growth mission into government priorities, with targeted investment that will raise the long-term ceiling of the economy,” Hellem said.
“But we know that the innovation, investment, and jobs necessary for growth will come from business, not Whitehall, and that government must work with business to create the right conditions to help shift the economy out of low gear.”
The CBI said the upcoming industrial strategy provided an opportunity for the government to signal its seriousness about growth, with firms expecting to hear a bold narrative on which sectors of the UK economy deserve the most attention.
“A missing part remains a joined-up people strategy to make sure our industries have the skills and the labour needed to go after growth opportunities,” Hellem warned.
“Unlocking investment through a comprehensive skills strategy, funding the growth and skills levy, tackling high energy costs for UK firms, and setting out a national strategy on tech adoption could help to establish a reinvigorated partnership model for effective collaboration between both government and business.”