Recovery in 2025 will be a marathon, not a sprint

A triple whammy for UK business

The rumblings from the Budget continue. On October 30^th the Chancellor announced a 1.2% point increase in Employer National Insurance to take this rate to 15% and cut the threshold at which employers start paying the tax from £9,100 to £5,000. Taken together, these measures are expected to raise about £25bn a year for the Government’s stretched coffers.

After boxing themselves in with their pre-election promises around no increase in income tax or National Insurance for employees and corporate tax, the Government has had to dig deep to find money from somewhere. But most UK companies will not really care whether the fiscal changes breach the manifesto tax pledges – for many businesses, particularly those in the labour-intensive retail and service sectors, this was a bruising budget.

What they are facing and becoming increasingly vocal about is a triple whammy comprising the rise in Employer National Insurance, a significant jump in the statutory minimum wage rates (impacting some employers) and no prospect of a cut in corporate tax during this Parliament. Plus of course the biggest overhaul of workers’ rights for a generation.

So, what will be the impact of the Budget on the economy? Two major effects will be felt in terms of the impact on public finances (and the future tax burden) as well as inflation (and therefore the outlook for interest rates). And what makes things even more challenging for the UK economic outlook is the change in administration in Washington.

The impact on finances and tax

Clearly those workers who have seen an increase in their minimum wage will be pleased for now. In the medium term though businesses have already indicated that the rise in employment costs highlighted above – and MHA estimate that it will lead to a 10% increase on the average bill for employing someone on the minimum wage – will have to be passed on to either employees or consumers.

We are likely to see lower annual wage rises and potentially less recruitment overall. This could represent a major turning point for companies looking to invest more in AI workplace solutions and, by implication, permanently removing some job roles. Businesses bearing the brunt of the fiscal hit is, in principle, what a left-of-centre government would do to support working people. However, eventually, everyone will pay the price for these changes, with those at the bottom potentially paying the biggest price.

There is the danger that squeezed profits (and the possibility of slower GDP growth) will lead to tax revenues stagnating - counter to the Government’s desire to fund public services and avoid more tax rises further down the line without an increase in public sector borrowing.

Inflation & interest rates

The Budget may well have thrown a spanner in the works concerning interest rate policy going forward, but the Bank of England has remained committed to their interest rate-cutting plan – for now.

While the BoE recently cut interest rates to 4.75%, we are unlikely to see a second cut in December because of the knock-on impact of measures announced in the Budget. The scale of public sector expenditure, combined with increases in the minimum wage and employer national insurance contributions leading to higher employment costs, will put upward pressure on prices for some time.

These factors, alongside rising household energy costs, mean we will see inflation edging a little higher over the coming months, encouraging a more cautious approach to cutting interest rates from the BoE in the medium term. On top of that, the Bank has already said that future interest rate cuts will depend on the UK economy avoiding “big new disturbances” after the US election.

There is also a longer-term issue to be considered. With this Budget heightening domestic wage growth inflationary pressures, there is a risk of a continued wage-price spiral. The BoE will have to devise a long-term strategy for handling inflation, as the 2% target is not likely to be met on a sustained basis for a few years.

Global trade will not come to the rescue.

As well as the twin impact from the UK Budget, noises off stage have added to the UK Government’s challenges. A key part of the growth that Reeves has set so much store by must come from growth in international trade. With Donald Trump winning a second Presidency and the Republicans taking total control of Congress, there is a real concern that the tariffs that he threatened in the election campaign will be introduced and stifle any recovery in trans-Atlantic trade. The EU is still, by far, our single biggest potential market and we are a relatively small economic power.

If our businesses find it too challenging and expensive to trade with the USA, will they turn their attention to the EU as a more user-friendly alternative? Either way, Starmer and his team building a good relationship with the incoming Administration will become vitally important in order to try and dampen down the worst excesses of any potential trade wars.

So, what can the Government do?

There are no silver bullet solutions to alleviate what might seem like a perfect storm for UK business and the UK economy. But I am firmly of the opinion that the best way to create sustainable growth and improve government finances is to increase productivity through long-term investment spending. The big question is how. The government must be forward-thinking and invest in the future - in infrastructure, people, and technology.

We must see more upgrading of our Victorian era railways and it Is vital there is a long-term commitment to a real investment in skills with apprenticeships and continuing professional development. And a significant investment in digital technology, especially across the public sector, to improve efficiency. We may be in a temporary or even medium- term hole but we must continue, as I believe the Chancellor does, to think longer term and get prepared for what is coming towards us from over the horizon. Recovery is a marathon, not a sprint.