UK businesses are cutting their plans for growth following tax rises announced in the Budget, according to the CBI, with almost half of those surveyed by the lobby group saying they would reduce headcount and almost two-thirds scaling back hiring.
Rain Newton-Smith, the CBI’s director-general, said at the group’s annual conference on Monday that after last month’s Budget, business leaders are asking themselves whether they can afford to invest, expand and take on new people.
She said that chancellor Rachel Reeves’ decision to raise employer national insurance contributions “caught us all off guard” and has “put a heavy burden on business”.
“Tax rises like this must never again simply be done to business,” she added.
Her remarks are the latest indication that relations between business and the government have soured since last month’s Budget, undoing the Labour party’s efforts to woo companies and investors in the run-up to July’s general election.
Business support has ebbed as a result of concerns about Labour’s workers’ rights package, as well as an increase in the national minimum wage and higher employers’ national insurance payments.
Reeves has countered that the government needed to raise money to restore stability to public finances and repair public services, and has tried to ease business fears by saying she will not have to raise taxes on that scale again.
Reeves will address the CBI conference on Monday afternoon, as will Tory leader Kemi Badenoch.
Newton-Smith argued in her speech that the government had to recognise that profit was essential for investment. “Profit’s not a bad thing, it’s not a dirty word.
“Profits aren’t just extra money for companies to stuff in a pillowcase . . . Your future profitability shapes your ability to invest and grow sustainably. Your future profitability is your reason to invest.”
Newton-Smith said the “island of growth” that the government is trying to achieve, is “still a long way off” given that the Office for Budget Responsibility forecasts just 1.5 per cent growth by the end of this parliament.
While Newton-Smith praised the government for taking the “brave decision” to change the Treasury’s fiscal rules to allow for increased capital spending, she called on ministers to “open a valve” to ease pressure on businesses.
This should include extending deregulation promised to the financial services sector at Reeves’ Mansion House speech this month to other sectors, to speed up planning, simplify tax rules and foster tech adoption.
Speeding up the promised reforms to the “broken business rates system” would also provide much-needed help to businesses.
Michael Devereux, professor of business taxation at the Saïd Business School at Oxford university, said that companies needed to aim to make a reasonable return on their investment but it was often hard to distinguish that from “excess” profit achieved by exploiting a lack of competition.
He said that the “government has spending needs, and revenue must be collected from somewhere” and pointed out that increasing corporation tax would have a more direct impact on investment than the national insurance increases.
A government spokesperson said the Budget had required “difficult choices” to put public finances on a firmer footing, and was now focused on growth.
“That is why the government is reforming the planning system, tackling barriers to trade and taking forward the £63bn of private sector investment announced at the International Investment Summit.”
The CBI’s survey of sentiment among its members following the Budget took place earlier this month and received 266 responses. As well as those planning to cut jobs and scale back new hiring, almost half said they would delay or temporarily reduce pay rises as a result of the cost increases related to higher national insurance contributions.
