You can hear the spin a mile away; as the Chancellor’s team prepares for the Spring Statement the political groundwork is being laid. The economy is struggling and Rachel Reeves is running out of palatable options.
So, despite the fact that the inevitable consequences of the government’s multi-billion pound tax raid on businesses have been clear for months, with economic growth suffocated, sources close to the Chancellor are now telling the media that “the world has changed.”
In other words, anything unpleasant that Reeves has to announce at the end of this month is a result of unforeseeable geopolitical developments.
It’s a convenient line, and I don’t dismiss it entirely, but before we let the government off the hook let’s just recap on the situation we find ourselves in.
We now have months and months of hard data revealing the impact of government policy, of ministers’ choices, on employers and industries across the country.
From agriculture to family businesses, from retail to hospitality, leisure, manufacturing and the services sector, businesses are meeting the imposition of higher taxes in a number of entirely predictable and rational ways.
Helpfully, these were outlined this week by Andrew Bailey, the Bank of England governor, in a letter to Dame Meg Hillier, the Labour chair of the Treasury Select Committee. In response to questions from that committee the governor outlined the ways in which the Bank of England expects employers to respond to the new costs facing them.
Here’s what he said:
“Firms may choose to absorb this increase in costs within their profit margins, pass on the cost to consumers through higher prices, or mitigate the impact by reducing nominal wages or employment.”
His conclusion is stark: “by far the most plausible assumption, supported by the survey evidence, is that firms will spread the adjustment along all four channels simultaneously.”
Now, the governor was talking specifically about employers’ reactions to the rise in the rate of National Insurance and the fall in the salary threshold at which firms have to start paying it – but we can add to that tax the consequences of a simultaneous hike in wage costs, the impact of inflation lingering for longer, the burdens of new employment law and the knock-on effects we’re seeing as firms cancel orders, pull back on investment and generally hunker down.
This week’s delivery of data and survey results from the likes of the CBI, S&P and BDO reveal the impact of government policy.
S&P’s purchasing managers’ index released on Monday showed staffing levels in the manufacturing sector falling in five out of the past six months as a result of “weak demand, low client confidence and rising cost pressures” – while their analysis of the services sector, released yesterday, showed UK service firms are cutting jobs at the sharpest rate since November 2020 as fears about the state of the economy spread.
The CBI, meanwhile, predicts that private sector activity will fall for a fourth consecutive quarter in the three months up to May. Accountants BDO say that firms are slashing jobs and consultancy Hanbury Strategy has issued a fresh warning on the impact of changes to employment law, with 34 per cent of company bosses polled citing the looming Employment Rights Bill as the biggest issue facing their business.
Oh and yesterday the British Chambers of Commerce became the latest authority to slash their growth forecast for the UK economy.
That, Chancellor, is how the world has changed.
That is why growth remains anaemic and that is why the most comprehensive and independent analysis of the different sectors that makeup the UK economy now show that business activity has been shrinking since last year’s Budget.
That is why the state of the public finances will necessitate massive cuts in the Spring Statement – to the welfare budget, we’re told – and good luck getting Labour MPs on board with that.
Yes, Trump’s tariffs and security concerns now come into the equation, of course, but their impact will be to weaken an already weakened economy.
It is now depressingly easy to cast forward a few months and picture the Chancellor announcing that taxes will have to rise because, you’ve guessed it, “the world has changed.”
But I’ve resolved to always end the Week in Business on a high note, and this week let me offer a salute to Games Workshop – the makers of computer games and fantasy figurines listed on the London Stock Exchange in 1994 and then basically did nothing – until it smashed into the FTSE last year after its performance – and share price – surged following a pandemic-induced explosion in the number of customers, and fans.
The firm now has a market cap north of £4.5bn and yesterday its share price – which has already risen by 50 per cent in a year – spiked another 8 per cent following a beautifully concise 49 word trading update issued to the market announcing further strong results. Everything about this company delights me; its lack of PR and fluff, its confidence, its relationship with customers, its closely-guarded IP, its presence on the high street.
I don’t play their games, but I am enjoying the ride.