The increase in employers’ national insurance from April 6, a central plank of Chancellor Rachel Reeves’ October 30 Budget, is aimed at raising around £25 billion a year. It is being implemented through a rise in the employers’ NI rate from 13.8% to 15% and a reduction in the threshold above which contributions are paid from £9,100 to £5,000.
Yesterday’s flash UK PMI (purchasing managers’ index) survey from S&P Global shows companies have been cutting workforces ahead of this rise in employers’ NI amid higher labour costs and weak demand.
One in three companies reporting lower staffing levels this month linked these falls directly to policies in the October Budget, the first from the incoming Labour Government.
The survey also reveals firms are raising their prices as a result of the employers’ NI rise at a time when the Bank of England is having to set interest rates against an unappealing backdrop of above-target inflation and weak growth.
S&P Global’s report shows UK private sector employment, in services and manufacturing, is falling overall this month at the fastest pace since November 2000.
It also reveals that “strong wage pressures” are contributing to the fastest increase in average cost burdens for 21 months.
The composite employment index has tumbled from 45.8 in January to 43.5 this month on a seasonally adjusted basis, taking it even further below the level of 50 deemed to separate expansion from contraction and thus indicating a significant acceleration of the rate of decline.
And the composite output index has edged down to 50.5 this month, from 50.6 in January, continuing to signal only slight expansion.
Thomas Pugh, economist at accountancy firm RSM UK, said: “The employment index dropped to just 43.5, its lowest level since the pandemic. Admittedly, the official employment data has held up much more strongly than the PMI would suggest. But clearly hiring intentions are continuing to weaken in the aftermath of the Budget.”
Chris Williamson, chief business economist at S&P Global Market Intelligence, noted “firms’ costs are rising at a rate not witnessed since May 2023, the rate of inflation having now accelerated for four straight months, putting further upward pressure on selling prices for both goods and services”.
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He added: “A key factor behind the upturn in inflationary pressures is the growing number of firms reporting the need to raise prices in order to help offset the impending rise in staff costs associated with the national insurance hike and uplift to the minimum wage announced in the autumn Budget.
“However, companies also reported that the Budget changes also played a major role in driving intensifying job cuts. Employment fell sharply again in February, dropping at a rate not seen since the global financial crisis if pandemic months are excluded. One in three companies reporting lower staffing levels directly linked the reduction to policies announced in last October’s Budget.”
S&P Global said: “Intense cost pressures were mainly linked to higher salary payments and the impact of suppliers seeking to pass on forthcoming increases in employers’ national insurance.
“Greater raw material costs and energy bills were also cited by manufacturing companies in February, with the overall rate of purchasing price inflation hitting a 25-month high. The latest survey also pointed to robust increases in prices charged by both manufacturers and service providers. Goods producers pointed to the strongest rate of factory gate price inflation since April 2023.”
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The Bank of England’s Monetary Policy Committee cut UK base rates by a quarter-point to 4.5% earlier this month.
Forecasting a further three, quarter-point reductions in 2025, Mr Pugh said of the PMI survey findings: “This combination of weak growth and rising inflation is a nightmare trade-off for the MPC, which will not want high interest rates to weigh on growth, but also needs to bear down on inflation. We continue to expect three additional 25bps (basis points) rate cuts this year.”
Matt Swannell, chief economic advisor to the EY ITEM Club think-tank, said the PMI survey “highlights the challenge facing the Bank of England in balancing and managing a weakening jobs market and inflationary pressures”.
He added: “The survey reported a further fall in headcount as firms adjusted to rising labour costs ahead of the upcoming change in employers’ national insurance contributions but at the same time companies increased prices significantly. Faced with this difficult balancing act, we think the Bank of England will continue to lower Bank Rate gradually.”
Figures published on Wednesday by the Office for National Statistics showed annual UK consumer prices index inflation rose from 2.5% in December to 3% in January, moving further above the 2% target set for the Bank of England by the Treasury.
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