Companies Hold Back on Hiring and Investment Ahead of Upcoming Budget

Businesses across the UK are pausing hiring and delaying investment decisions as uncertainty looms ahead of the government’s forthcoming Budget, set for October 30. Ben Jones, lead economist at the Confederation of British Industry (CBI), indicated that many firms are waiting for more clarity regarding the government’s economic policies before committing to new hires or capital expenditures.

The CBI’s remarks coincide with recent data revealing that the UK economy experienced modest growth in August, expanding by 0.2%. This increase was primarily driven by a resurgence in the construction sector, alongside strong performances from accountancy, manufacturing, and retail businesses. However, despite this uptick, the Office for National Statistics (ONS) cautioned that the overall economic outlook remains bleak, with signs of slowing growth compared to earlier in the year.

Liz McKeown, director of economic statistics at the ONS, emphasized that while August showed positive growth, the broader trend indicates a deceleration in economic activity. Analysts are urging the government to clarify its economic and industrial strategies, particularly as the UK prepares to host an International Investment Summit in London next week, aiming to attract significant foreign investments.

Jones highlighted the critical opportunity for the government to foster economic growth by presenting a credible plan that supports business investment. He noted that speculation surrounding potential tax increases has caused many companies to adopt a cautious approach in September, further stalling decision-making.

Prime Minister Sir Keir Starmer has warned that the upcoming Budget could be “painful,” acknowledging the likelihood of tax increases as the government grapples with higher debt levels resulting from the pandemic, rising interest rates, and inflation that has only recently stabilized.

Debate surrounding the specifics of potential tax hikes is intensifying, especially as the government has committed to not increasing taxes on “working people” and has ruled out raising VAT, National Insurance, or income tax. Rumors are circulating about a possible increase in capital gains tax, which applies to profits from the sale of assets like second homes. Other potential measures could involve cutting pension tax relief or increasing fuel duties.

There is also uncertainty regarding Labour’s promise to maintain National Insurance rates, particularly concerning the employer’s contribution, a question that was sidestepped during Prime Minister’s Questions this week.

Adrian Hanrahan, managing director of chemicals exporter Robinson Brothers, voiced his concerns about potential increases in National Insurance for employers, calling it “just another tax on companies.” He lamented that manufacturing firms like his often feel vulnerable to tax increases, making them easy targets.

Additionally, Hanrahan criticized aspects of the government’s Employment Rights Bill, particularly the proposed lengths of probation periods, arguing that such measures would not support growth in the sector.

In a bid to stimulate the economy, Chancellor Rachel Reeves is planning to revise borrowing rules to unlock billions for major projects, although this may coincide with the introduction of new tax hikes. Reeves stated that prioritizing economic growth is essential for addressing challenges like NHS funding and improving the living standards of working people.

Anna Leach, chief economist at the Institute of Directors, suggested that the government could use the investment summit and the Budget to shift focus away from the national debt and instead emphasize building a sustainable economy for the future. This approach could foster better public finances and improved living standards.

The ONS monitors monthly GDP performance, but longer-term trends over three months are generally more significant. The UK economy faced a shallow recession at the end of the previous year, contracting for two consecutive three-month periods. Growth rebounded in the first half of 2024, yet ongoing concerns persist.

Ahead of Monday’s investment summit, Spanish energy giant Iberdrola, owner of Scottish Power, announced plans to double its UK investment from £12 billion to £24 billion over the next four years. Keith Anderson, chief executive of Scottish Power, indicated that these funds would be allocated to expanding the electricity grid to connect more homes and businesses.

Anderson emphasized the need for faster planning processes to expedite project completion. He argued that if the government could streamline planning, it would enable the company to increase its investments significantly.

The government has set ambitious targets to replace fossil fuels with renewable energy by 2030. However, critics express doubts about the feasibility of these goals within the proposed timeframe, raising concerns about the potential for increased energy bills and the impact of infrastructure developments on rural communities. Anderson countered that transitioning to wind power would ultimately lead to lower energy costs over time, despite recent spikes in gas prices.