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Businesses are facing “short-term pain” from a “tough budget”, including a £25 billion hit from higher employment taxes, Britain’s largest lobby groups and senior leaders have said.
Delivering Labour’s first budget in 14 years, Rachel Reeves said the government was “asking business to contribute more” as she announced an increase in the employers’ national insurance rate by 1.2 per centage points to 15 per from April, compounding a series of other tax hits to the private sector.
The government has vowed to work closely with business leaders to help unlock investment to kickstart sluggish economic growth and to help rebuild public services and infrastructure and raise living standards.
• Rachel Reeves admits budget will mean lower pay rises for workers — follow live
“We need to drive growth, promote entrepreneurship, and support wealth creation, while raising the revenue required to fund our public services and restore our public finances,” the chancellor told the House of Commons.
Many of the most damaging fiscal changes facing businesses and investors, including the prospect of a rise in capital gains tax, had leaked in recent weeks, and combined with stark warnings of pain from senior ministers had dented business confidence.
The “magnitude” of the national insurance tax rise was, though, greater than expected and business leaders said it was a “tough budget for business to swallow”.
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Shevaun Haviland, director-general of the British Chambers of Commerce, said the increase in national insurance contributions on top of a 6.7 per cent increase in the national living wage “means many firms will find it more challenging to invest and recruit in the short-term”.
However, in comments echoed by the heads of the UK’s other big business groups, Haviland said the chancellor had sought to offset the “upfront hit” on companies through a “longer-term framework to provide stability for the economy”.
It includes plans to raise infrastructure spending, sector-specific business rates relief, additional support for small businesses, a corporation tax “roadmap”, so-called full expensing and the annual investment allowance made permanent and retaining research and development relief.
Rain Newton-Smith, chief executive of the CBI, another business lobby group, which represents some of the country’s largest employers, such as AstraZeneca, Unilever and GSK, called it a “tough budget for business”.
She said that although the corporation tax roadmap, including a commitment to cap the tax rate at 25 per cent for the duration of the parliament, will help “create much-needed stability, the hike in national insurance contributions alongside other increases to the employer cost base will increase the burden on business and hit the ability to invest and ultimately make it more expensive to hire people or give pay rises”.
Roger Barker, director of policy at the Institute of Directors, said there appeared “precious little in the government’s first budget which offers anything other than short-term pain for the business community” and warned “the risk is that this will exert a negative impact on business confidence, with worrying implications for the economy’s future growth trajectory”.
Barker added, however, that Reeves’s loosening of the government’s fiscal rules to enable greater borrowing for investment as well as the new National Wealth Fund in directing investment towards the future industries “will hopefully make a positive contribution to the economy’s long-term growth prospects”.
Business leaders and investors have been eagerly awaiting the budget since Labour’s election victory in July.
Speaking before the budget Dame Emma Walmsley, chief executive of the pharmaceuticals firm GSK, said “it is important for us that the fiscal environment remains competitive”.
After the budget Andy Briggs, the chief executive of Phoenix Group, the UK’s largest long-term savings and retirement business, said changes to the fiscal rules “make economic sense if implemented in the right way”.
Steve Hare, chief executive of the software company Sage Group, said the budget “introduces significant challenges for UK businesses, especially small and medium-sized ones. Many businesses, however, will welcome the longer-term certainty and clarity provided, allowing them to plan and adapt effectively.”
To protect the smallest businesses from the increase in employers’ national insurance, Reeves said the government would raise the employment allowance from £5,000 to £10,500, meaning 865,000 employers will not pay any national insurance at all next year and more than one million will pay the same or less than they did previously.
Tina McKenzie, policy chairwoman at the Federation of Small Businesses, said increasing the allowance for small businesses by a “record amount is a very welcome move and we’re pleased the chancellor has heard us loud and clear”.