The last time Labour delivered a budget, it was praised by future Brexit negotiator David Frost, then director-general of the British Chambers of Commerce, for “clearly recognising the need to place business at [its] heart.”
Such warm words have been hard to find this time around. That’s unsurprising, given the eyewatering £40bn of tax rises are the second-largest on record, according to the IFS.
Employer costs
It’s a particularly tough one for businesses, which are shouldering the greatest burden: £25bn through National Insurance hikes alone.
That will sting. Especially when Labour is simultaneously urging those same businesses to be the golden goose that gives the UK a much-needed economic boost.
Whether these two themes are realistically compatible was not a question for today. Instead, businesses are largely focused on finding the huge sums to cover the 1.2% rise on their employees’ National Insurance bill.
A big chunk of that figure stems from Labour lowering the salary threshold for paying National Insurance from £9,100 to £5,000, which works out as an extra £615 per employee.
Unintended consequences
The government argues these tax rises are necessary to fix public services and invest in the UK’s future. However, commentators have been quick to point out some potential unintended consequences.
“The revenue-raising measure is likely to have immediate knock-on consequences, whether that is pausing hiring, scaling back or scrapping pay increases,” says Damon Hopkins at financial services consultancy Broadstone.
For Rupert Ashby, CEO of the British Frozen Food Federation, the National Insurance hike is “not a welcome move”.
“This is yet another challenge for food producers who are still dealing with the effects of food inflation. They will have little choice, other than to pass this cost on to customers in the form of higher food prices, at a time when many people are still struggling with the cost of living crisis,” he warns.
The tax hike is all the more painful in light of yesterday’s confirmation that the minimum wage is going up to £12.21 for over-21s in April, meaning an extra £1,400 per year for every eligible full-time employee.
£600m in added costs for convenience
Trade groups have been busy estimating the cost of these two combined measures. The Association of Convenience Stores predicts an extra £600m in costs for its members next year, while the Federation of Wholesale Distributors estimates wholesalers will have to find another £110m.
“At a time we should be incentivising businesses to turbocharge economic growth across the economy, almost a quarter of our members may now be forced to reduce investment in other critical areas of their business,” says James Bielby, CEO of FWD.
George Hughes-Davies, founder of cold-pressed juice company Daily Dose, is also concerned. “These changes make an already uncompetitive UK even less attractive for anyone looking to set up a business in the UK.”
Silver lining and double-edged sword
Some, however, have been keen to find a silver lining. While the changes no doubt mean a challenging adjustment period for businesses, it should also give “a welcome boost to consumer confidence, which has been notably low,” notes Erin Brookes at management consultants Alvarez & Marsal.
Reeves also offered up a double-edged sword on business rates. While the existing 75% discount will expire in April – meaning a hefty rise in bills – the government guaranteed a 40% discount for 2025-2026.
Small firms, in particular, have said they are reassured by the continued mitigation.
There is no doubt, however, that business rates are still in need of more fundamental reform. “Labour pledged a complete overhaul but have only tinkered, with higher reliefs for hospitality and leisure without saying how councils will be compensated,” says Sebastian Payne, director of think tank UK Onward. “More exemptions/reliefs mean more red tape for SMEs.”
Can the budget reinvigorate growth?
Today was always going to be painful. But Labour hopes this will be the only tax raid necessary for the next five years – a hope it no doubt shares with businesses.
And Labour will need to listen to the views of business, given that plugging the so-called ‘black hole’ in public spending is just one half of its challenge. The other side is reinvigorating economic growth, which will require a vibrant and confident private sector.
Labour has taken a mighty risk today, gambling it can both raid corporate pockets and simultaneously stimulate growth. More than anyone, businesses will be hoping it pays off.
No comments yet