We must protect our fragile business confidence

Business confidence is a tricky thing. It matters for investment and employment rates, and therefore economic growth. But it can evaporate as pressures mount and bosses worry about outgoings and order books. Right now business leaders are looking aghast at the juggernaut of new costs heading their way. Besides the £25bn jump in National Insurance costs, there is the proposed package of workers’ rights which is expected to cost around £5bn. It’s a substantial amount all in one go and has led to warnings of job cuts and price rises.

At the CBI conference last month, director-general Rain Newton-Smith warned that this looming burden meant businesses were now questioning investment, hiring and expansion plans; that firms that have been through really tough years are now in damage control again: “When you hit profits, you hit competitiveness, you hit investment. You hit growth,” she said.

CBI chair Rupert Soames flagged up conflicting government policies. Getting 1mn of the 9mn people of working age currently not in employment into productive work will indeed drive growth and increase tax revenues, but while the government wants private businesses to create the jobs, it is at the same time choosing to make employing people much more expensive (through the Budget changes) and much more risky (through the employment rights bill).

Meanwhile, the Federation of Small Businesses has pointed out that the government’s watchdog, the Regulatory Policy Committee, has marked several of the impact assessments of the workers’ rights legislation as “not fit for purpose”, and the Federation warns that “the country cannot afford to pile further cost and risk on to small employers based on such an overwhelmingly weak evidence base”.

The chancellor has stressed there will never be a Budget like her first one again, arguing there was no alternative, and the government's case is that improved employment rights will translate into productivity gains. But not everyone is convinced these outcomes will ensue.

For a start, growth and borrowing are working against Rachel Reeves. GDP growth slowed more than expected in the third quarter at just 0.1 per cent, down from 0.5 per cent in Q2; the S&P UK PMI report noted weaker business optimism, falling private sector workforce numbers and rising cost inflation in November, while government borrowing in October was £8.7bn higher than had been forecast in March, due in part to the surge in public sector pay and ballooning debt interest. If growth is not forthcoming further borrowing and tax rises may be back on the cards.  

However, Pantheon Macroeconomics suggests growth will accelerate in the final quarter, a view that is shared by others – ING expects to see modest growth over the winter months and a boost next year from the Budget. The EY ITEM Club expects steady (but not spectacular) growth in 2025 and believes gains in real incomes will support consumer spending. Nevertheless, private sector confidence is a fragile thing. It should be bolstered, not beaten down.