Business leaders are facing a tense period leading up to the chancellor’s second Budget, following a series of tax increases implemented last year.
Companies are still adjusting to the impact of these measures, including the £25 billion National Insurance increase and a significant rise in the minimum wage.
As the Budget approaches, confidence within boardrooms has become increasingly precarious. Recent sentiment surveys among chief executives and finance officers have consistently raised concerns.
Therefore, what can business owners and leaders expect from Rachel Reeves?
A rise in taxes appears inevitable, a move that will invariably withdraw capital from the economy. Capital Economics estimates the Budget could reduce GDP by 0.2% in 2026 – a notable impact considering the economy’s modest 0.1% growth in the third quarter of this year.
However, while the chancellor removes capital, the Bank of England might counteract this by lowering interest rates, encouraging borrowing and spending among individuals and businesses.
Moreover, according to a senior government advisor speaking to the BBC, several key factors influencing business confidence, such as inflation, are anticipated to decline in the coming year. The chancellor is likely to emphasize these positive developments.
In terms of business, the government will aim to be judged on what it refrains from doing in the Budget: specifically, avoiding further unwelcome surprises and broad tax increases.
Rain Newton-Smith, head of the CBI, has stated that “stability is the only road to growth,” urging the government to avoid imposing additional taxes on businesses.
Speaking at the CBI’s annual conference, she emphasized the need for the government to make “hard choices for growth now before they get harder, having the courage to take two tough decisions rather than 20 easier ones”.
“It means one or two broad tax rises, rather than death by a thousand taxes.”
What measures might be included?
Business rates remain a contentious issue. Many companies have seen their bills nearly double, following the reduction of a pandemic-era discount of 75% for retail, hospitality, and leisure businesses to 40% last year.
The chancellor has previously committed to reform. She could potentially make the existing discounts permanent and eliminate abrupt increases in rates for expanding small businesses. This could be partially funded by raising rates on the largest retail properties.
Business Secretary Peter Kyle addressed the Confederation of British Industry (CBI) conference on Monday, announcing several business-friendly policies.
He pledged to reduce electricity bills for 7,000 British businesses and stated that the British Business Bank would prioritize lending to the eight “high potential” sectors identified in the industrial strategy.
He told the conference: “Let’s not kid ourselves — actual growth, real growth, comes from enterprise and wealth creation.
“We will build a pro-business, pro-wealth creation, pro-growth Britain. This week’s budget will take the fair and necessary choices to embed that further.”
The chancellor is also expected to reference the upcoming Planning and Infrastructure Bill, which she has called “probably the biggest thing we will do this parliament,” as a means of removing obstacles to growth.
Bank profits are a tempting target, and there have been conflicting signals about a potential tax increase. However, ministers are concerned that such a move would contradict the pro-growth, pro-investment narrative.
The Treasury might consider reducing payments to the Bank of England, which cover losses from the sale of government bonds acquired during the pandemic and financial crisis.
This would consequently reduce payments to commercial banks, effectively functioning as a bank tax.
The oil and gas industry has actively lobbied for relief from the “windfall” taxes on their profits, arguing that low oil prices negate windfall profits. They contend that investment in the North Sea is rapidly declining, leading to refinery and chemical plant closures, and propose that tax relief could safeguard jobs.
The additional 38% tax, which supplements the existing 40% tax rate specific to the industry, is slated to expire in 2030. It is possible that this could be phased out sooner.
Concerns persist among business leaders regarding the government’s Employment Rights Bill, which promises sick pay and protection from unfair dismissal for new employees from their first day of employment.
Rain Newton-Smith told the CBI conference that the government should “change course” on the bill and that businesses were not being listened to.
While there is no indication the government is retreating, Kyle recently informed a committee of MPs that 26 consultations will precede the implementation of these measures.
The business secretary stated on the BBC’s Today program on Monday that any legislative changes would “be implemented in a way that is benefiting business and benefiting the people who work in business”.
“We do not see this as zero-sum,” he clarified.
Conservative leader Kemi Badenoch criticised the bill her speech to the CBI, saying it would allow new hires to lodge claims with an employment tribunal “before they’ve even worked out where the toilets are”.
She said this would make hiring “riskier, slower and a lot more expensive”.
The chancellor is also expected to speak in the Budget about consumers having the “confidence to spend”.
Some in the business community will interpret this as possibly heralding another higher-than-inflation rise in the national living wage, which also tends to push up other salaries in a firm’s wage structure.
One other policy that will hit both employers and employees is a cap on salary sacrifice schemes which allow workers to put some of their pre-tax earnings into their pension pots.
Such schemes are widely used in larger companies and there is concern that cutting them will mean less generous workplace pensions in the years to come.
The government wants businesses to believe that it sides with them, acknowledging the significant demands made last time, and assuring them that they will be spared this time around, even receiving marginal assistance.
After months of anxious waiting business may then breathe a collective sigh of relief.
According to a recent survey by Barclays, 55% of business leaders say they are delaying investment decisions until they have seen the Budget. However, 43% anticipate increasing investment afterward, a sign of potential pent-up optimism.
Nonetheless, confidence remains fragile, requiring the chancellor to proceed with caution.
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