Pressure is piling on chancellor Rachel Reeves to U-turn on key economic policies after a damning new report suggested businesses are preparing to cut staff and raise prices.
In yet another sign the Treasury’s woes aren’t going anywhere, a fresh report from the Confederation of British Industry (CBI) indicated private sector firms expect to face another significant fall in activity over the next three months, having already dropped over the previous three-month period.
Activity has been flat or falling since the middle of 2022, reflecting a prolonged period of stagnation. But the upcoming increase in national insurance contributions has prompted firms to assess their budgets urgently, the CBI said.
The survey sparked renewed calls for the chancellor to “handbrake turn” on the policies announced in her autumn Budget, with the Liberal Democrats saying the chancellor “must accept that [it] has not worked”.
open image in galleryRachel Reeves is under growing pressure to U-turn on her policies (PA Media)
The warnings come as Ms Reeves prepares to make a major announcement on planning reform.
Ahead of a speech later this week, the chancellor promised to “take an axe to red tape that slows down approval of infrastructure projects”, betting her economic credentials on a commuter town boom in a hope it will spark growth in the UK.
She is expected to use her speech to support a proposed third runway at Heathrow airport and to endorse expansion at Gatwick and Luton.
Asked about the plans on the BBC on Sunday, the chancellor refused to be drawn on what she said was speculation but said decisions would be subject to “full collective ministerial responsibility”.
“A lot [has] changed in terms of aviation,” she said. “There’s huge investment going on in electric planes, and also a third runway will mean that instead of circling London, flights can land at Heathrow.”
open image in galleryMs Reeves is preparing to make a major announcement on planning reform (Getty Images)
Asked whether an announcement about the expansion of the airport was imminent, Ms Reeves said: “Well you’ll see the plans when we set them out. But already this government has signed off expansion at London City airport and Stansted airport. Both of those decisions, again, were decisions that the previous government had stalled.”
The CBI’s survey suggested sentiment among businesses dipped in the aftermath of the government’s autumn Budget, with some respondents highlighting that the tax rises had resulted in them taking steps to mitigate higher costs – including raising prices, trimming investment plans and cutting staff.
Daisy Cooper, the Lib Dems’ Treasury spokesperson, called on the chancellor to “heed these warnings and do a handbrake turn to reverse the misguided jobs tax, properly reform the broken business rates system and create growth through a bespoke UK-EU customs union”.
“After years of Conservative economic vandalism, millions have been hammered by a cost of living crisis, but the Labour chancellor must accept that her Budget has not worked in turning that around,” she added.
open image in galleryLiberal Democrats Treasury spokesperson Daisy Cooper called on Ms Reeves to accept her ‘Budget had not worked’ (PA Wire)
Meanwhile, Tory MP Harriett Baldwin, who sits on the Treasury select committee, told The Independent there is “still time to backtrack from the damage [the chancellor] has done to pensioners, farmers and the private sector”.
“This is another shockingly bad outlook from the private sector which the UK economy relies on to give us growth,” she said.
Shadow business secretary Andrew Griffith added: “Day after day the number of businesses shouting out in fear for the future grows stronger but the chancellor continues to ignore their pleas.
“Businesses are clear that the real blocker to growth is Rachel Reeves and the mistakes being made by this government.”
But defending Ms Reeves’s Budget, Labour MP Jeevun Sandher – another member of the Treasury committee – said the party took office “during the worst domestic crisis in 70 years”.
open image in galleryShadow business secretary Andrew Griffith said businesses are ‘shouting out in fear for the future’ (PA Wire)
“The decisions we’ve taken to fix this country, such as investing to rebuild our crumbling infrastructure, take time to fully be felt,” he told The Independent.
“It’s also worth waiting to see what actually happens in the months ahead. The IMF, for example, believes we’ll be the fastest growing major European economy in the coming years.”
The International Monetary Fund forecast last week that the UK economy would grow by 1.6 per cent in 2025 after a weaker than expected 2024.
While the government has consistently defended its Budget, saying the measures will help it to plug a “black hole” in the country’s finances, recent rises in borrowing costs threaten Ms Reeves’s economic plans, while business leaders continue to voice concerns over upcoming tax rises.
Last week, the boss of Next said the hike in national insurance rates for employers in April will make it more difficult for people entering the workforce. And on Thursday, Sainsbury’s announced it was cutting 3,000 jobs two months after it said Ms Reeves’s Budget would cost it £140m.
There has also been growing criticism in the farming industry, where family farm owners are concerned over changes to rules on inheritance tax from April next year.
Alpesh Paleja, interim deputy chief economist for the CBI, warned there is an “urgent need to get momentum back into the economy”.
“After a grim lead-up to Christmas, the new year hasn’t brought any sense of renewal, with businesses still expecting a significant fall in activity,” he said.
“Alongside plans to cut staff and raise prices further, this risks an increasingly awkward trade-off for policymakers. Anecdotes suggest that companies are being hit by lacklustre demand and caution among consumers, while also continuing to adjust to measures announced in the Budget.”
The CBI, a membership organisation which represents large chains through to small businesses, surveyed 990 firms between December and January.
A Treasury spokesperson said: “We delivered a once-in-a-parliament budget to wipe the slate clean and deliver the stability businesses so desperately need while not increasing taxes in people’s payslips.
“By bringing back political and financial stability, we are creating the conditions for economic growth.
“Business investment in the third quarter of this year is estimated to have increased by 4.5 per cent compared to this time last year and PwC research earlier this week confirmed that the UK is the second most important destination for investment after the US. This is the first time the UK has secured this spot in the 28-year history of the survey.”