The Chancellor’s Budget statement in the House of Commons on 30 October set out the new government’s plans for the economy in the short, medium and long term. Economists and a host of other commentators are moving on from the headlines in the statement itself to the myriad of underlying details now emerging.
Budget details for businesses
We looked at the immediate implications for businesses and entrepreneurs in our blog on the day of the Budget. In broad terms, the alleged £22bn ‘black hole’ in the public finances has been neatly transferred onto the cost base of British business, mainly through the increase in employers’ National Insurance (NI) contributions for the next tax year. This is intended to raise £25bn in extra revenue for the Exchequer.
On top of this burden came the announcement of an increase to the National Minimum Wage (NMW) from next April of over three times inflation (6.7%) and even higher rises for those under 21 and for apprentices. UKHospitality published their calculation that this and the NI hike would raise the cost of employing a worker full-time for 38 hours at the NMW by a startling £2,500 a year.
The final major impact on the business community will be the continuation of Business Rates relief for smaller premises previously due to expire in March 2025 but at a substantially reduced discount of 40%, down from 75% previously. The result will be that the rates bill for those businesses affected will double from April 2025.
There are a number of other tax raising measures affecting specific industries.
What will this mean for the economy?
Growth
A core objective of the new government is to deliver significant and sustained growth. The Office for Budget Responsibility (OBR) report on the Budget predicts that GDP will rise over the life of the current parliament as follows:
2024 – 1.1% 2025 – 2.0% 2026 – 1.8% 2027 – 1.5% 2028 – 1.5% 2029 – 1.6%
This equates to average annual growth of 1.7% from next year on. This is below the long-term historical trend, which shows that the UK’s GDP average growth was 1.9% during the thirty years between 1990 and 2019, the last full year before the pandemic threw the economy into turmoil. In twenty one of these years, growth was above 1.7%.
This predicted growth may count as sustained, but calling it significant is wide of the mark. ‘Steady’ might be more accurate.
Inflation
After a peak of 11.1% in October 2022, the CPI rate finally fell below the Bank of England’s target to reach 1.7% in September 2024. The OBR’s estimates for average annual inflation following the Budget are:
2024 – 2.5% 2025 – 2.6% 2026 – 2.3% 2027 – 2.1% 2028 – 2.1% 2029 – 2.0%
Interest rates
Although the Bank of England has now cut interest rates by 0.25% to 4.75%, this predicted inflation trend is likely to impact the pace at which interest rates can be brought down and the level at which they might settle. Market expectations have already adjusted to this likelihood, as well as to the reality of the higher government borrowing intentions signalled by the Chancellor. Now, the election of Donald Trump in the USA may influence UK interest rates, as we discuss later in this review.
Workers’ rights
The Employment Rights Bill was introduced to Parliament on 10 October 2024. It will improve workers’ rights and have cost and operational implications for employers, in addition to its potential effect on business confidence taken together with the Budget measures.
Will business failures rise?
After last year’s record total of corporate insolvencies, there has been no coherent pattern to the monthly figures for 2024. The UK total for September 2024 of 1,902 was down by some 5% on August 2024 and 9% lower than September 2023. Looking at the more reliable rolling twelve months’ total, September 2024 was only marginally higher by 2% than September 2023 but 44% above the immediate pre-pandemic level in February 2020.
Whatever the overall impact of the major cost rises from the Budget for the economy as a whole, certain industries will be particularly badly affected. There have already been warnings of increased business failures in hospitality, retail and leisure. These sectors already account for over a quarter of insolvencies. It is difficult to see how they can escape an increase in distress and failures.
Construction is a sector threatened by a different problem: a lack of capacity in the face of increased demand driven by government targets for building 300k new houses a year and plans for a string of infrastructure initiatives. Our very recent sector report highlighted the vulnerability of smaller contractors and sub-contractors. There is a very real risk for them that over-trading will bring a rash of casualties.
Business outlook
Owners and managers will be hard at it, working out how to deal with the cost increases facing them from April 2025. Can they increase their prices, reduce their workforce or lower pay rates? None of these options are simple and managing the expectations of key stakeholders such as employees, lenders and suppliers will be challenging. They must be realistic about the future and not be afraid to take independent advice where necessary to help them find the right way forward.
Trump’s victory in the US
As if businesses were not going to be under enough pressure after the Budget, hard on its heels comes confirmation of the remarkable political comeback that has made Donald Trump not just the 45th but now also the 47th President of the USA.
In case anyone thinks that this extraordinary development is only relevant to the USA, there could be a very rude awakening just ten weeks down the road after Trump has been sworn in as President. His threat to load huge extra tariffs onto goods imported from anywhere in the world has very considerable commercial and financial implications here in the UK.
To find out more about what Trump’s victory could mean for the UK business community, read our detailed analysis here.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.