Businesses' confidence plummets under Reeves' tax crackdown; turmoil may intensify further
Business confidence declines sharply in Q2 as Rachel Reeves' tax measures take effect, leading to mounting concerns over the economic outlook.
The CBI's Sector Services Survey reveals that consumer services' optimism slumped to -42 per cent, marking its eighth consecutive monthly decrease. Likewise, business value fell drastically to -56 per cent, as average selling prices surged by 32 per cent – more than double the long-term average of 14 per cent.
Optimism in the business and professional services sector also saw a significant drop, with a reading of -43 per cent, down from -28 per cent in February.
The survey, which polled 215 firms, sheds light on key business trends, including costs, sales, and hiring. Alpesh Paleja, the deputy chief economist at CBI, asserts that businesses are being hampered by the impact of higher employer National Insurance Contributions (NICs) and the National Living Wage, both of which add pressure to their own cost base and dampen demand from clients.
Consequently, respondents foresee more hardship ahead, with business and professional services anticipating profitability to plummet to -47 per cent in the ensuing three months, compared to -34 per cent in the previous quarter. Similarly, consumer services expect employment numbers to contract further, with a predicted decline of -36 per cent in the next three months.
In April, the Chancellor increased the employer's NICs by 1.2 per cent to 15 per cent, while the National Living Wage climbed to £12.21 from £11.44. These changes led to an increase in employment costs, resulting in a deterioration in overall sentiment regarding employment across the sector to -28 per cent, as more companies trimmed their workforce.
According to Paleja, the first half of 2023 has been a challenging period for the services sector due to the double burden of escalating costs and prices. He emphasizes that the Bank of England is concerned about the persistence of domestic inflationary pressures, particularly worrying given the current rate of inflation jumping to 3.5 per cent in April.
Rachel Reeves, expected to deliver the Spending Review and Industrial Strategy on June 11, faces the task of striking a balance between economic growth and public service expenditure while adhering to her self-declared "iron clad" fiscal rules. Paleja urges the government to use the review as an opportunity to "unlock growth enablers" and make it easier to invest in skills and minimize the regulatory burden on businesses to encourage investment, growth, and boost confidence.
- The decline in business confidence could also impact the finance sector, as increased costs and prices weigh on financial institutions' profitability.
- The surge in average selling prices, coupled with the increase in employer National Insurance Contributions (NICs) and the National Living Wage, has made insurance premiums more expensive for businesses, potentially dampening demand.
- To improve the economic outlook and boost business confidence, it's crucial for Rachel Reeves to focus on policy measures that encourage investment, minimize regulatory burdens on businesses, and bolster the services sector.
