(Dec 5): More than half of UK businesses plan to increase prices and cut jobs in response to Chancellor of the Exchequer Rachel Reeves’ £26 billion (RM146.87 billion) hike in employer payroll taxes, threatening to increase inflationary pressures.
Some 54% of chief financial officers (CFOs) said they would pass the tax hike back to consumers through higher prices, with the same proportion saying they expected to have lower employment as a result of the move, according to the Bank of England’s (BOE) monthly Decision Maker Panel survey published on Thursday.
The findings will add to the concerns of BOE rate-setters who are waiting for signs of the impact of Reeves’ tax raid on businesses to determine whether it will derail their plans to slowly reduce interest rates.
Officials have been unsure whether firms will react to the hike by raising prices, curbing wage growth, reducing employment or taking a hit to profits.
The BOE survey suggested the bank could face a policy dilemma. While it pointed to higher inflation in the short-term, the survey also suggested that it would lower employment, potentially bringing down price pressures later on.
In her budget in October, the chancellor increased the rate of national insurance contributions (NICs) paid by employers by 1.2 percentage points, while also cutting the wage threshold at which they start making contributions. That made up the bulk of her revenue raising to pay for improved public services, and led to a backlash from businesses.
As a result of those changes, almost two in five CFOs said they would pay lower wages than they otherwise would have done, while 59% said they would take a hit to their profits.
“I expect the Bank to look through the short-term price rise and focus on the expected decline in medium term inflation dynamics instead,” said Tomasz Wieladek, chief European economist at T Rowe Price. “Given that policy is determined by the medium-term forecast, the NICs rise could have a mildly dovish effect on the direction of rates overall.”
In an interview with the Financial Times released on Wednesday, Governor Andrew Bailey said the BOE would wait and see how firms respond to the NICs rise. “As we go into spring, we will have a better sense of where it’s heading,” he said.
Rate-setters cut the bank’s key rate for the first time since the pandemic in August, and followed that up with another quarter-point reduction last month. Markets are pricing in between three and four further cuts by the end of 2025.
Nevertheless, Thursday’s data provides a signal of the direction of travel. The survey also included signs that firms’ inflation expectations are creeping higher again after the budget. Businesses expected to raise prices over the next year by 3.7% in the three months to November, up from 3.5% previously. Their year-ahead inflation expectations also edged up to 2.7%, remaining stubbornly above the BOE’s 2% target.
CFOs expected wages to grow 4% over the next 12 months. While this was down slightly from 4.1%, it remained well above levels the BOE sees as consistent with keeping inflation low.
BOE rate-setters have highlighted the importance of the survey to their thinking in recent months, as they try to judge how long underlying price pressures will linger.
“This is a notable turn from the down-trend in those indicators in the past 18 months and the Monetary Policy Committee can afford to cut interest rates only gradually given these signals of continued inflation persistence,” said Rob Wood, chief UK economist at Pantheon Macroeconomics.
Uploaded by Felyx Teoh