Taxes and tariffs combine to ‘drag business sentiment’
The double whammy of Rachel Reeves’ taxes and Donald Trump’s tariffs have dragged confidence in business volumes to their lowest level in more than two years, fresh data has found, further clouding prospects for the British economy.
The UK has already suffered from lacklustre growth over the last few years as real GDP only expanded by 1.1 per cent in 2024.
But a new survey by the Confederation of British Industry (CBI) has suggested that private sector activity “remains subdued” as firms expected activity to fall further in the three months to July.
The CBI’s growth indicator suggested business and professional services expected business levels to drop, with consumer services firms expecting the sharpest decline.
Manufacturers see a shallower fall coming, though the sector has already suffered from unprecedented drops in output according to separate research by Make UK.
The new figures are likely to deal a blow to Reeves, who has trumpeted the government’s ambition to deliver higher growth despite raising employers’ national insurance contributions as well as a raft of other specific taxes aimed at digital services and manufacturers.
CBI economist Alpesh Paleja said the latest survey of over 1,000 firms pointed to “weaker economic momentum”.
“Uncertainty has ramped up over the last few weeks, following the back-and-forth on tariffs levied by the US and, subsequently, big movements in financial markets,” Paleja said.
“Global volatility is another drag on business sentiment, already hit by the rise in national insurance contributions and the national living wage, and continued concern over the Employment Rights Bill.”
The government’s next two big fiscal events will come in the publication of its industrial strategy and this summer’s spending review.
Treasury minister Darren Jones has said he is looking at the government’s budget “line by line” as he looks to reduce wasteful spending.
Firms are anxious for a reprieve from tax pressures piled on by governments in previous set piece events.
“The combined impact on hiring and investment plans means that it’s more important than ever for the government to focus on the growth levers that it can control.
“Businesses need to see the government using the forthcoming industrial strategy and spending review to prioritize key measures to unlock growth.”
Lower growth prospects will prove challenging for Reeves, whose meagre £9.9bn fiscal headroom is at risk of getting wiped out.
Economists at the Institute for Fiscal Studies and EY believe the Chancellor may have to raise taxes further in the autumn if she wishes to stick to her fiscal rules.
The spending review will be the first indicator about how far the government is willing to go in cutting spending as the Treasury looks to rebuild some of Reeves’ headroom ahead of this year’s Budget.