The Budget’s hidden cost: paralysed investment and weak growth

Let’s make no bones about it: business confidence at the moment is fragile. And in truth, I don’t think Rachel Reeves’ Budget has done much to help turn things around. In fact, the Budget started to take its toll long before the Chancellor actually got to her feet on November 26. Months of speculation about what she would, or would not, announce paralysed business investment and put a chill on many investment decisions.

Now we’ve had chance to look at the speech, I fear things are no better. 

The big U-turn on whether to raise income tax, and the ongoing row about whether she was economical with the truth over the Office for Budget Responsibility’s forecasts, have arguably weakened the Chancellor’s credibility. And a weak Chancellor is bad for all of us. Investment, both from home and overseas, starts to dry up, stifling any growth that might have been coming through.

I know, from my role as chief executive of one of the region’s fastest-growing law firms, just how fragile confidence has become. And it’s particularly brittle among our small and medium-sized enterprises. Yet the recent Budget risks placing further strain on them. Many are still reeling from last year’s increase in National Insurance contributions and now have to contend with an above-inflation rise in minimum wage levels, which simply adds to the cost of employing people.

It’s difficult to understand the logic of calling for growth and simultaneously making it more expensive to recruit new staff. Similarly, the decision to limit pension contributions through salary sacrifice schemes seems a classic case of punishing people financially for trying to do the right thing.

For years we have been told to invest in pensions to secure our retirement, but now both employers and employees will be taxed more if we go over a very modest cap in trying to do so. And, of course, the introduction of new wealth taxes is another charge on success – and does nothing to help create the entrepreneurial, dynamic economy we all want to see.

Take the new Mansion Tax as an example. It will inevitably depress activity in the top end of the housing market. That will cascade down the chain and further slow a market which is already showing signs of cooling nationally. A reform of Stamp Duty Land Tax would have been a more constructive measure, stimulating transactions and supporting the property sector which is vital to regional growth.

Growth forecasts have also been cut, which further adds to the uncertainty facing clients weighing up investment decisions. This Budget does little to encourage growth-creating decisions in the future. 

Indeed, when businesses are unsure about the future, they delay hiring, expansion and innovation. That hesitation has a direct impact on the Midlands economy. And for professional services firms, the Budget creates both challenges and opportunities.

Rising costs, including that minimum wage increase, will fuel inflation and force businesses to raise prices. This places pressure not only on our own sector but on the clients we serve, from manufacturers to farmers.

Farming clients will feel disappointed that their campaign against agricultural inheritance tax rules has not, so far, succeeded, though the ability to transfer the 100% relief allowance between spouses is a modest step forward. 

Meanwhile, the decision to tax electric vehicle schemes undermines efforts to encourage sustainable transport, particularly when households are already paying VAT on the electricity they use at home. 

There are, however, elements of the Budget to welcome. The big investment in mayoral-led regional authorities is certainly good news for those areas, as are steps to reduce energy bills for 7,000 key firms. 

As a firm which is campaigning to open up new routes into a career in the law – and actively promotes apprenticeships – we applaud the commitment to make training for under-25 apprenticeships completely free for SMEs. Likewise, the £820 million investment to guarantee every young person a place in college, an apprenticeship or personalised job support.

But the big picture is one of fragile confidence, little growth and a nation paying the highest levels of tax in this country’s history. Those are far from the ingredients for the growth and prosperity we all want to see. 

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