Business leaders plan to cut costs and rein in hiring in response to government tax increases set out in the autumn budget, with employment expectations taking the sharpest tumble since the start of the coronavirus pandemic.
A net two-thirds of finance directors said they did not expect to increase hiring levels this year, a four-year high, with a net 26% feeling more pessimistic about the prospects for their business than three months ago, the first time sentiment had slipped into negative territory in 18 months, according to the latest survey by the accountancy firm Deloitte.
More than half of finance directors rated cutting costs as their top priority – something that has not changed in almost a year. They said this would be their main response to increased national insurance costs for employers followed by raising productivity and then higher prices for customers.
A similar sentiment emerged in the advisory firm BDO’s employment index, which hit a 12-year low in December, amid declining vacancies and payrolled employee numbers.
BDO said it expected hiring intentions to decline further as businesses adjust to increased national insurance costs and higher wage bills, although it said potential interest rate cuts may help alleviate some of that pressure.
The figures are the latest to indicate a negative response to the increase to employers’ national insurance contributions – the main revenue raiser in Rachel Reeves’s October budget.
Ian Stewart, the chief economist at Deloitte, said: “With cost control to the fore in the wake of the budget, chief financial officers have trimmed expectations for corporate investment, discretionary spending and hiring in the next 12 months. But despite a fall in business confidence, we expect to see UK growth picking up over the summer on the back of easy fiscal policy and interest rate reductions, with GDP growth likely to exceed the 2024 outturn and the performance of the euro area.”
Finance directors expect interest rates to drop by 0.75 percentage points to 4% by the end of 2025, helping with borrowing costs for businesses and households alike.
The surveys reflect comments by senior business leaders including the bosses of Next, Marks & Spencer, Sainsbury’s and Tesco last week, who all suggested they would be investing in automation and keeping a tight rein on new hires amid higher wage costs – particularly for those in the lowest-paid roles.
This month’s latest jobs report from the consultancy KPMG and the recruitment firm REC also showed many firms reluctant to hire.
The Bank of England said last month that government policy decisions had created “additional uncertainties” around the economic outlook.
Turmoil in the bond markets has also revived fears of rising borrowing costs, which could hold back investment by businesses.
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A separate report by Make UK and PwC found that manufacturers still believe that the UK is a competitive place to produce its goods, despite the challenges posed by rising costs and the threat of a trade war raised by Donald Trump’s second term as US president.
Almost six in 10 companies said they would increase investment in response to an industrial strategy, and Make UK urged the government to “set out in detail as soon as possible the full proposals of a formal long-term industrial strategy”.
“Manufacturers have demonstrated their resilience over and over again in recent years and, despite the numerous challenges they face, those that remain innovative and are prepared to invest in new technologies, expanding markets and, most crucially, their people will continue to thrive,” said Stephen Phipson, chief executive of Make UK.
“To help companies navigate a way through these challenges it is now vital that government sets out as a matter of urgency the immediate and significant priorities as part of its formal industrial strategy given the very clear benefits manufacturers believe this will bring,” he added.
