Research concludes Labour warnings of tough budget may have sapped optimism about the economy

Lloyds’ latest survey found business confidence fell three points to 47%, a three-month low, although it is still above the long-term average of 29%. Photograph: Dan Kitwood/Getty Images

UK business confidence has dropped to its lowest level since the general election, as firms grow more pessimistic about the economic outlook.

Amid fears that the Labour government’s warnings of a tough budget in October have hurt the economy, the latest Lloyds Bank Business Barometer has found that business optimism weakened this month to its lowest level since June.

Business optimism had hit eight-year highs in July and August, after solid economic growth in the first half of 2024. But Lloyds’ latest survey, carried out in the first half of September, found that confidence fell three points to 47%, a three-month low, but still above the long-term average of 29%.

The decline was down to mounting concerns about the economy: while 57% of businesses felt confident, 19% were less positive. This caused a nine-point fall in the net balance of economic optimism, to 38%, the lowest since March.

“Although overall confidence fell this month, that fall was from an eight-year high, and businesses remain positive about their own trading prospects,” said Hann-Ju Ho, a senior economist at Lloyds Bank Commercial Banking.

“The more mixed picture for economic optimism points to some businesses maintaining a degree of caution. While we still expect economic expansion, it may occur at a slower rate than the first half of 2024,” Ho warned.

The chancellor, Rachel Reeves, has already said October’s budget will require “difficult decisions on tax, spending and welfare”, while also hinting last week that she could relax the government’s self-imposed fiscal rules to prioritise investment.

Last week, the Recruitment and Employment Confederation reported a sharp drop in confidence among employers about hiring in August, while the British Retail Consortium found that consumer confidence fell significantly in September.

A separate survey from KPMG released on Monday found that three-quarters of financial services leaders expected the budget to have at least a moderate impact on their business.

More than a quarter of bosses surveyed across the banking, insurance, asset and wealth management, and private equity sectors expect a significant impact, according to KPMG’s latest UK Financial Services Sentiment Survey.

Almost one-third of leaders expect the biggest impact to be sector-specific tax increases such as bank surcharges. More than a quarter expect an impact on payroll costs, while 19% say tax changes to non-doms will affect their business.

“Leaders in the sector are gearing up for this budget to have a considerable impact on their business,” said Karim Haji, the global and UK head of financial services for KPMG.

“While there are notable expectations about sectoral tax rises, leaders will hope for a period of stability thereafter to ensure the current tax regime for financial services remains competitive,” Haji said.

British banks, which have enjoyed bumper profits in recent years thanks to higher interest rates, have been lobbying the government not to increases taxes on the sector.

It emerged last week that Reeves is rethinking parts of Labour’s crackdown on super-rich non-domiciles, amid concerns inside the Treasury that the Office for Budget Responsibility (OBR) may conclude the plans will raise no money at all and could prompt wealthy foreigners to leave the UK.

KPMG found that bosses view inflation pressures as the biggest business challenge over the rest of the year, followed by interest rates. However, they remain upbeat about the prospects for business growth and profitability in the fourth quarter of 2024.

Haji said: “While leaders are also optimistic about the economic outlook, the knock-on effects of a turbulent economy continue to weigh on their businesses.

“Leaders are dealing with a myriad of challenges and it’s easy to see how the more immediate, closer-to-home issues could detract from challenges that pose a greater threat to business longer term, such as ESG and technology advancements.”