(Bloomberg) -- British businesses have warned they will hire fewer people and cut back on investments after the Labour government raised taxes by £40 billion ($52 billion).
Chancellor of the Exchequer Rachel Reeves ruled out direct tax hikes on workers ahead of Wednesday’s budget, leaving companies and shareholders on the hook for most of the extra revenue.
She lifted employers’ national insurance contributions, a major payroll tax, by 1.2 percentage points and lowered the threshold so that businesses start to pay it when a worker earns £5,000.
“This is an absolute disaster,” said Adam Cunard, whose Picturedrome group of cinemas employs 110 people, mostly on a part-time basis. He said the budget, which also included a 6.7% hike to the minimum wage, would knock 30% off his company’s bottom line.
“All it’s going to mean is fewer jobs, and fewer decent jobs because we won’t be able to offer the hours.”
Britain’s fiscal watchdog, the Office for Budget Responsibility, said more than three quarters of the increase in national insurance would be passed through to workers in the form of lower salaries. Labour ministers had created a “false dichotomy” between taxes on workers and those on businesses, according to the Institute of Directors. It said the higher payroll tax would keep down wages and employment.
Reeves’ budget included measures to protect the UK’s smallest businesses with a relief that it said would mean 865,000 employers paying no national insurance. The move was welcomed by the Federation of Small Businesses, a lobby group, while some other business figures were relieved that tax hikes — particularly on wealth — were not more severe.
Overall, the budget was a “mixed bag” for small businesses, according to Graham Clemett, head of office provider Workspace, with the negative impact of national insurance hikes partially offset by the retention of the entrepreneurs relief.
“Net-net I’d say longer term these changes are potentially positive, but I think the shorter term impact of some of these cost increases could be quite a challenge for businesses over the next couple of years.”
Growth Mission
Labour has pledged to grow the UK economy at a faster rate than its Group of Seven peers by significantly boosting investment, and repeatedly called itself a pro-business party, claiming the mantle typically held by Britain’s Conservatives. The OBR said growth would double to 2% in 2025, due to a temporary uplift from Reeves’ policies which include greater borrowing to fund infrastructure projects.
“The stars are aligning for the UK at the moment and this budget certainly hasn’t dimmed them,” said Steven Fine, CEO of investment bank Peel Hunt.
However, business groups said the extra costs from Wednesday’s budget would reduce investment and growth. The cut to the national insurance threshold will affect companies with large numbers of part-time staff. The British Retail Consortium said Reeves added an extra £367 million compared with their pre-budget expectations, while UKHospitality — which represents pubs and restaurants — said the budget would increase the annual tax bill in the sector to £3 billion.
Capital Gains
“Do I think it was a pro-business budget? No,” said Neville Prior, chairman of Cornelius Group, a chemicals business that employs around 100 people. He said the firm, which supplies some international consumer goods retailers, would restrict hiring to roles that were entirely necessary and try to make existing equipment last longer instead of replacing it.
Prior said rising capital gains tax would also hit investment.
“The government says it’s business friendly but you don’t have businesses unless you have shareholders — you need people to be putting money in,” he added. “Increasing CGT is an anti-business tax because it will make people think again about investing.”
--With assistance from Chloé Meley and Charles Capel.
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