UK businesses plan price hikes and job cuts amid tax increases Bank of England survey shows

UK businesses are bracing for higher prices and job cuts following a hike in employers' social security contributions, set to take effect in April.

A Bank of England (BoE) survey of over 2,000 firms, released on January 9, revealed widespread concerns about the economic impact of the increase, Caliber.Az reports via foreign media sources.

The BoE's Decision Maker Panel showed that 61% of companies expect profits to fall, with 54% planning to raise prices and 53% forecasting a reduction in staff numbers. Additionally, 39% of businesses anticipate smaller pay rises as a result of the rise in National Insurance, which was outlined in the government's October 30 budget.

Other surveys have echoed these concerns, showing a decline in business sentiment, as well as reduced hiring and investment intentions since Chancellor Rachel Reeves announced a £25 billion ($31 billion) increase in payroll taxes. This has contributed to growing fears in financial markets about the UK's public debt levels, leading to a sharp rise in borrowing costs.

In another concerning sign, figures released on January 9 by a recruitment agency association revealed that demand for new staff had fallen by the largest amount since August 2020.

As the BoE contemplates when to lower interest rates again, it is closely monitoring the potential impact of higher employment costs on inflation. The central bank is particularly concerned about whether businesses will pass on these higher costs through price increases or whether job cuts, reduced investment, and slower wage growth will further slow the economy.

Rob Wood, Chief UK Economist at Pantheon Macroeconomics, noted that the BoE's survey suggests the tax hikes are more likely to drive price increases than an economic slowdown. He added, “The core DMP questions continue to signal stubborn inflation and wage growth, with a less severe weakening in the jobs market than qualitative surveys show, which should keep the Monetary Policy Committee cutting interest rates only ‘gradually.’”

UK consumer price inflation rose to 2.6% in November, marking an eight-month high, and the BoE expects inflation to rise further in 2025, with the 2% target not being reached until 2027. This economic backdrop has made the central bank cautious about slashing interest rates from their current level of 4.75%.

The BoE survey, conducted between December 6 and December 20, indicated that firms plan to raise prices by 3.8% over the next 12 months, slightly higher than the 3.7% expected in the three months leading up to November. Expected wage growth remained steady at 4.0%, based on a three-month moving average in December.

By Tamilla Hasanova