Business confidence in the UK has dropped for the first time in a year, as concerns over rising taxes reached a record high ahead of the Autumn Budget, according to ICAEW’s Business Confidence Monitor (BCM) Q3.
The cautious outlook hinges on an uncertain investment climate, as businesses wait to see what the Labour government’s first budget holds for the UK economy.
The ICAEW quarterly study, which surveys 1,000 chartered accountants across the UK, recorded a confidence level of 14.4 in Q3 2024 – the first decline in 12 months and down on last quarter’s reading of 16.7. However, despite the fall, business confidence remains strong and is still double the pre-pandemic average.
Alan Vallance, ICAEW Chief Executive, says: “The findings show that businesses are troubled by the tax burden and increasingly reluctant to invest. As the UK prepares to host a major Investment Summit, and speculation mounts ahead of a difficult budget, the Chancellor must give companies the certainty and stability they need.”
Reforms to VAT and business rates, alongside public and private investment to drive long-term growth and prosperity for the UK, could help to achieve this, Vallance adds.
Tax concerns rise
The tax burden was cited as a growing challenge by 29% of businesses questioned, a joint record high for the survey and significantly higher than the historic average. The government has said it will not increase the rates of income tax, national insurance or VAT, and will cap corporation tax at its current level for the duration of this parliament. However, there are concerns that the Budget will see the Chancellor announce tax increases elsewhere, with capital gains tax one potential area of change, ICAEW says, which may have affected business confidence.
Although almost all sectors said they were increasingly troubled by tax challenges, this concern was most prominent among businesses operating in the energy, water and mining (44%), property (38%) and retail and wholesale (32%) sectors.
Meanwhile, exports growth slowed to 2.7% in Q3, down from 3% in the previous quarter and the lowest rate since Q4 2023, probably due to concerns over demand in key overseas markets, ICAEW says. In contrast, domestic sales growth reached 3.8% – up from 3.3% in Q2 – the fastest rate for a year.
Vallance adds: “While there remain clear reasons for optimism, this drop in confidence suggests that businesses are still cautious about the future.”
Weaker sales expectations cloud growth outlook
Respondents said they expect domestic and exports sales to grow over the next 12 months, but expectations have weakened compared to the previous quarter.
Businesses in services sectors, as well as construction – buoyed by government announcements about reforms to planning, housebuilding and falling interest rates – were most confident.
However, confidence in the transport and storage sector slumped, likely due to increased regulatory concerns including EU border changes, and the weak domestic sales expectations, ICAEW says. Confidence also fell sharply in energy, water and mining, amid worries over tax after the government announced changes to the energy profits levy and increased regulation to punish water pollution, as well as weak predictions for future export and sales growth.
ICAEW believes the Budget is an opportunity to boost confidence and is calling on the government to conduct an urgent review of the UK’s tax system and introduce reforms to stimulate economic growth, build confidence and drive investment.
Suren Thiru, ICAEW Economics Director, says: “These figures suggest a slight reality check for the UK economy as weaker expected export and investment activity, alongside fears of a painful Budget, dented business confidence despite a boost from stronger domestic sales growth.
“The notable easing across the indicators of selling prices and salary costs provides reassurance that inflationary pressures remain in check and keeps the door open for a November rate cut.
“While our survey indicates that the economy will expand in the third quarter, the pace of growth is likely to be slower compared to recent quarters, as the momentum from the large recent falls in inflation fades.”
Inflation worries recede
Selling price inflation dropped to its lowest level since Q1 2022 and is expected to continue slowing over the next 12 months, the report finds. In the year ahead, it is expected to be highest in the transport and storage and property sectors, and slowest in energy, water and mining.
Salary growth slowed slightly to 3.6% year-on-year, the lowest rate for over two years, but still nearly double the pre-pandemic average, businesses reported. Overall, wage growth is expected to slow further in the next 12 months, the BCM found.
Investment stalling
Companies reported only a slight rise in capital investment in Q2, marginally up quarter-on-quarter. Capital investment spending is expected to be strongest in retail and wholesale, and weakest in transport and storage.
Businesses said they plan to increase investment by just 1.9% over the next 12 months; in Q2, companies said they plan to increase investment by 2.1%.
For a deeper dive into the current economic climate in the UK, read the latest ICAEW Economic update: examining pre-Budget indicators.
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