UK businesses are reducing staff at the quickest pace since 2021 following the budget announcement
UK businesses are cutting staff numbers at the fastest rate since the global financial crisis, according to a closely watched business survey blaming the government’s tax-raising budget.
The latest snapshot from the purchasing managers’ index (PMI) survey, which is monitored by the Treasury and the Bank of England, showed employment levels fell in December at the fastest rate since 2009, excluding the period during the coronavirus pandemic.
The survey of 650 manufacturers and 650 service sector companies showed a combination of softer demand, rising employment costs and squeezed profit margins led to a reduction in private sector headcount.
Economic growth has slowed down since the strong growth earlier this year. This is because businesses and households have reacted negatively to the new Labour government’s gloomy speeches and policies, said Chris Williamson, the chief business economist at S&P Global Market Intelligence, which tracks the PMI survey.
Companies are cutting back on hiring because of the higher national insurance contributions and new rules about staffing.
A clearer understanding of how Chancellor Rachel Reeves’s budget will affect the economy will come on 26 March. This is when the independent Office for Budget Responsibility (OBR) will release its next forecast.
On Monday, the Treasury said it had asked the OBR to create a new set of projections, which is required by law. Reeves will give a speech to MPs with the forecast details, but her next full budget will not be until autumn 2025.
According to the PMI survey, many companies noted challenges to growth, such as weak consumer confidence, tighter business budgets, and cuts to non-essential spending. Increased salary payments and domestic inflation also added pressure on businesses.
The December PMI stayed at 50.5, the same as in November. This index measures growth in private sector activity across manufacturing and services, with a number above 50 showing growth.]
S&P Global said that the drop in the number of workers in December was the biggest since January 2021, when the government used the Covid furlough scheme to help prevent major job losses during the pandemic.
Official numbers from last week showed that the UK economy shrank by 0.1% in October, highlighting the challenge Keir Starmer faces in making the UK the fastest-growing economy in the G7.
Business leaders have warned that the plan to increase employer national insurance contributions by £25bn from April, announced in the October budget, will force companies to reduce hiring, slow down wage growth, and increase prices.
The chancellor has said this measure, part of a £40bn tax-raising budget, is needed to fix struggling public services and fill a financial gap left by the previous Conservative government.
Andrew Griffith, the shadow business secretary, called the latest PMI data “shocking.” He said, “This follows Labour’s jobs tax just like night follows day. The Chancellor needs to listen to businesses, not just her union supporters, or working people will keep suffering.”
Threadneedle Street is watching how businesses react to the budget. If businesses raise prices, it could make inflation worse, which might lead the Bank to keep interest rates high for longer. On the other hand, if businesses lay off workers, it could weaken the labor market and increase pressure for rate cuts.
The UK’s jobs market has slowed down recently but is still strong, with annual wage growth at some of the highest levels in decades.
Official figures out on Tuesday are expected to show that unemployment stayed the same in the three months leading up to October, based on a Reuters poll of economists. Wage growth, excluding bonuses, is also expected to rise from 4.8% to 5%.
The Bank of England’s monetary policy committee is expected to keep interest rates at 4.75% on Thursday.
A Treasury spokesperson said tough decisions are needed to restore economic stability but added, “We are fully committed to supporting business – we have kept corporation tax at 25%, confirmed full permanent expensing, and are working with businesses to unlock more growth opportunities for the country.”
Published: 17th December 2024
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