British Firms’ Optimism Wanes as Potential Tax Increases Loom

Business confidence in the United Kingdom has hit a three-month low as companies anticipate possible tax hikes in the upcoming Budget. A recent Lloyds Bank survey reveals that business confidence has decreased by three points to 47%, with many employers expressing unease about Labour’s forthcoming Budget, which could potentially increase corporate taxes and alter employment regulations.

The latest Lloyds Bank Business Barometer, which polled 1,200 businesses, shows growing pessimism regarding the economic outlook. Confidence has fallen to its lowest point since March, with nearly one-fifth of businesses reporting decreased confidence compared to August. Economic optimism also saw a sharp decline, dropping from an eight-year high in August to just 38% in September.

Despite the overall decline in confidence, many companies remain optimistic about their individual business prospects. Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, notes that businesses are still “optimistic about their own trading outlook” and continue to focus on job creation and growth. However, caution prevails, with Ho predicting a potential slowdown in UK economic expansion in the latter half of 2024.

The confidence dip follows cautionary statements from Labour leader Sir Keir Starmer and Shadow Chancellor Rachel Reeves about the challenging economic landscape. Reeves described the current economic situation as the most difficult since World War II, suggesting a “tough” Budget in October. Starmer reinforced this sentiment, stating that “conditions may deteriorate before they improve.”

These statements have raised concerns in the City that such negative forecasts could become a self-fulfilling prophecy, further dampening business morale. The fear of tax increases, particularly for businesses, is adding to the uncertainty. While Reeves has pledged not to raise VAT, national insurance, or income tax, she has not ruled out business tax hikes, causing unease in the financial services sector and beyond.

Additional research from KPMG indicates that 28% of financial services executives anticipate the upcoming Budget to significantly impact their operations, with nearly a third expecting sector-specific tax increases. Karim Haji, head of financial services at KPMG, suggested that the uncertainty surrounding the Budget could be contributing to the decline in business confidence, emphasizing the need for clearer financial services policies.

Despite the gloomy outlook, the UK received some positive news from the Organisation for Economic Cooperation and Development (OECD), which revised its growth forecast for the country upwards. The OECD now projects the UK’s GDP to grow by 1.1% this year, up from a previous estimate of 0.4%. This growth outlook is the strongest among G7 nations, offering a ray of hope for the struggling economy.

However, many businesses remain concerned about potential new employment regulations and corporate tax changes. Some are particularly worried about Labour’s “New Deal for Working People,” a union-friendly package that includes plans to remove anti-strike measures and introduce a “right to disconnect,” which would limit employer contact with staff outside of working hours.

As companies prepare for what could be a challenging period, there are increasing calls for the government to engage more closely with the private sector. Many hope that Labour will adopt an approach similar to Tony Blair’s New Labour era, where consultation with businesses was central to policy-making.

In the meantime, firms across the UK will be closely monitoring how the government’s tax and employment policies develop in the coming weeks. With confidence on the decline, clear communication and a balanced approach to taxation and business regulation will be crucial to maintaining the UK’s status as a global financial center.