Firms Hold Back on Hiring and Investment Decisions Ahead of Budget Announcement

According to a prominent business group, many firms are currently "pausing" their hiring and investment activities in light of potential tax increases expected in the forthcoming government Budget.

Economic Uncertainty

Ben Jones, the lead economist for the CBI (Confederation of British Industry), stated that numerous businesses are postponing important decisions while they await "more clarity" regarding the new government's economic strategies. The government is set to unveil its tax and spending plans on October 30.

These comments from the CBI come as new data reveals that the UK economy saw a slight growth of 0.2% in August. This growth was primarily fueled by a recovery in the construction sector, along with a robust performance from accounting firms, manufacturers, and retailers. Prior to this growth, the economy had stagnated during June and July.

Nevertheless, officials from the Office for National Statistics (ONS) caution that the broader outlook for the UK's economy remains one of decreased growth. Liz McKeown, the ONS’s director of economic statistics, noted, "The overall picture indicates a slowdown in growth over recent months compared to earlier in the year."

Need for Clarity

In light of these circumstances, economists stress the necessity for businesses to have a clear understanding of the government’s economic intentions and industrial policies. This is especially crucial as the UK prepares to host its International Investment Summit in London next week, where government ministers will aim to secure significant investments.

The CBI, which represents around 170,000 businesses across the UK, emphasized that the government has an opportunity to present a "credible plan" for supporting business investment, particularly ahead of the Budget announcement. Mr. Jones added, "Our surveys suggest that businesses may have eased off in September amid speculation surrounding potential Budget announcements."

Upcoming Budget Concerns

Prime Minister Sir Keir Starmer has already indicated that the upcoming Budget is likely to be "painful," with some tax hikes anticipated. This Budget is a critical moment for the government to outline its spending and taxation priorities, especially considering the substantial national debt incurred during the pandemic, alongside rising interest rates and inflation rates that have only recently stabilized.

The speculation surrounding the Budget has ignited discussions about what tax increases Chancellor Rachel Reeves could potentially announce. The government has pledged not to increase the financial burden on "working people" and has ruled out raising VAT, National Insurance, or income tax. However, there are rumors about an increase in capital gains tax, which is applied to profits from the sale of assets that have appreciated, like second homes. Other potential options for the Chancellor include cutting tax relief on pensions and raising fuel duty.

Industry Reactions

There is also uncertainty regarding Labour's commitment not to raise National Insurance, particularly concerning the employer's contribution, which Sir Keir avoided commenting on when questioned by Conservative leader Rishi Sunak.

Adrian Hanrahan, managing director of the chemicals exporter Robinson Brothers, expressed his concerns about any increase in National Insurance contributions for employers, describing it as "another tax on companies." He stated, "As a manufacturing business in this country, we feel like we are an easy target for taxes. We have no option to relocate, making us vulnerable to taxation," during an interview with BBC Newsnight.

Plans for Growth

Chancellor Reeves aims to amend borrowing regulations to release billions more for substantial projects that could enhance the economy, even though this won't eliminate the need for tax increases. She stated recently that fostering economic growth is the government’s primary goal, which would support the NHS, aid in rebuilding the country, and improve the lives of working individuals.

Anna Leach, chief economist at the Institute of Directors, remarked that the government could use the investment summit and the Budget to shift the focus away from national debt and towards "building the economy of the future." She emphasized, "This is essential for sustainable public finances and improved living standards."

The ONS continuously tracks GDP (gross domestic product) on a monthly basis, but trends over a three-month period tend to attract more attention. A weaker performance earlier in the summer resulted in a modest growth of 0.2% from June to August relative to previous quarterly periods. The UK experienced a short recession at the end of last year, contracting for two consecutive three-month periods, although growth rebounded in the first half of 2024.

Investment Opportunities

As the investment summit approaches, Spanish energy giant Iberdrola, owner of Scottish Power, announced plans to double its UK investment over the next four years, increasing from £12 billion to £24 billion. Keith Anderson, CEO of Scottish Power, mentioned that these funds would be allocated towards enhancing the UK's electricity grid to better support homes and businesses.

Anderson indicated that the primary request from the company to the government is to expedite the planning process to enable quicker project completions. He asserted, "If you streamline the planning process, we will commit to increasing our investment, which is precisely what we are dedicating to today."

The government has ambitious goals to transition nearly entirely from fossil fuels to clean, renewable energy sources for UK electricity production by 2030. However, critics argue that such a transition is unrealistic within the given timeframe and could lead to higher energy costs. Concerns regarding the construction of essential pylons, cables, and substations for electricity distribution, particularly in rural areas, have also been raised.

Despite these challenges, Anderson noted that the recent spike in energy bills can primarily be attributed to fluctuating gas prices and asserted that transitioning to wind energy could ultimately lead to reduced costs over several years.

hiring, investment, budget