Firms Delay Hiring and Investment as Budget Approaches

A prominent business group has highlighted that many companies are currently "pausing" their hiring and investments. This trend comes as firms await clearer indications of government policies ahead of the upcoming Budget announcement.

According to Ben Jones, the lead economist at the Confederation of British Industry (CBI), several businesses are deferring key decisions until they receive more insight into the direction of the new government’s economic strategies. The CBI represents around 170,000 businesses across the UK.

The government is set to unveil its tax and spending plans in the Budget scheduled for 30 October. As firms hold back, new data indicates that the UK economy saw a slight growth of 0.2% in August, driven by a rebound in sectors like construction, accountancy, manufacturing, and retail.

Concerns About Economic Growth

Despite the positive growth in August, the Office for National Statistics (ONS) cautioned that the overall outlook for the UK's economy remains weak. Liz McKeown, director of economic statistics at the ONS, noted that growth has been slowing in recent months compared to the robust performance earlier in the year.

In light of this, economists assert that businesses are seeking clarity on government economic plans and industrial policies especially as the UK prepares for its International Investment Summit in London next week. During this summit, ministers will aim to attract significant foreign investment.

Need for a Credible Economic Plan

The CBI believes that the government has a vital opportunity to stimulate economic growth by presenting a credible plan that supports business investments ahead of the Budget. Mr. Jones suggested that businesses have been cautious in September, influenced by speculations surrounding potential announcements in the Budget.

Prime Minister Sir Keir Starmer has indicated that the forthcoming Budget will have some challenging elements, admitting that tax increases are likely. The government is under pressure to define its spending and taxation priorities against a backdrop of escalating national debt from the pandemic, rising interest rates, and a recent return to normal inflation levels.

Taxation Speculations

Debate is growing regarding potential tax increases that Chancellor Rachel Reeves might propose. The government has committed to not increasing the tax burden on "working people" and ruled out raising VAT, National Insurance, or income tax. However, there are discussions around possibly raising capital gains tax, which applies to profits made from selling assets like second homes. Additional options could include reducing tax relief on pensions and raising fuel duties.

Concerns from the Business Sector

Adrian Hanrahan, managing director of Robinson Brothers, a chemicals exporter, expressed concern that increases in National Insurance contributions for employers represent an additional tax burden on companies. He criticized the government's stance, stating that manufacturing firms are particularly vulnerable to taxation and feel they have few options to move operations elsewhere.

Furthermore, Mr. Hanrahan voiced criticism over certain aspects of the government's Employment Rights Bill, particularly the proposed nine-month probation period for new staff, which he believes could hinder growth in the manufacturing sector.

Investment and Borrowing Plans

Chancellor Reeves is considering modifications to borrowing rules aimed at allowing increased spending on major projects to help boost the economy. However, this strategy is unlikely to avert the introduction of further tax increases. Reeves has stated that expanding the UK economy is the primary focus of the government, which would facilitate improvements to the NHS and enhance living standards for workers.

Shifting Economic Focus

Anna Leach, the chief economist at the Institute of Directors, suggests that the government could utilize the upcoming investment summit and the Budget to redirect attention from the national debt towards initiatives focused on future economic growth. She emphasized that fostering sustainable public finances and elevating living standards should be the main goal.

While the ONS regularly tracks GDP (gross domestic product), analysts typically look at growth trends over a three-month period. The weak performance earlier in the summer has resulted in a modest growth of just 0.2% between June and August compared to previous months. The UK had experienced a shallow recession at the close of the last year, with economic contraction occurring over two consecutive quarters.

Investment Commitment from Companies

In an encouraging sign ahead of the investment summit, Iberdrola, the Spanish energy firm that owns Scottish Power, announced plans to double its investment in the UK from £12 billion to £24 billion over the next four years. Keith Anderson, chief executive of Scottish Power, stated that the funds would be aimed at enhancing the electricity grid to support the connection of more homes and businesses.

He additionally remarked that speeding up the planning process would facilitate quicker project completions. If the planning could be expedited, he is ready to match that commitment with increased investment.

The government is working towards a goal of replacing fossil fuels with renewable energy sources by 2030, though critics question the feasibility of this transition within the proposed timeline. Concerns also persist among rural communities regarding the infrastructure needed to support this energy shift.

However, Mr. Anderson explained that the rise in energy bills seen in recent years has largely been influenced by volatile gas prices, and transitioning to wind energy could lead to decreased bills over time.

Economy, Investment, Hiring