Companies cut jobs at the fastest pace since the 2009 financial crisis, the pandemic aside, as evidence mounted that the fallout from Chancellor Rachel Reeves’ £26bn tax hike was slowing the economy.

A closely watched survey showed a steep decline in employment this year among businesses in Britain’s powerful services sector, responsible for more than three quarters of UK output.

Firms are not replacing voluntary leavers due to rising employment costs, the report says, such as upcoming increases in employers’ national insurance contributions and the minimum wage.

The preliminary S&P Global Flash Composite Purchasing Managers’ Index remained unchanged at 50.5 in December. It was close to the 50.6 expected by economists and slightly above the 50 threshold separating growth and contraction.

Bosses blamed a £25bn increase in employer national insurance rates in the Budget in October for “encouraging” cutbacks to working hours and longer-term efforts to restructure workforces.

The survey showed a third straight fall in employment. It was the sharpest cut since 2009 excluding the period of the coronavirus outbreak and associated lockdowns. Business confidence sank to a two-year low and firms raised prices at the fastest pace for nine months.

Suppliers’ prices also rose as they sought to protect profits by passing on additional costs from higher wages.

The combination of “stalled” growth and returning inflation is stoking fresh fears of stagflation.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Businesses are reporting a triple whammy of gloomy news as 2024 comes to a close, with economic growth stalled, employment slumping and inflation back on the rise.

“Economic growth momentum has been lost since the robust expansion seen earlier in the year, as businesses and households have responded negatively to the new Labour Government’s downbeat rhetoric and policies.

“Firms are responding to the increase in national insurance contributions and new regulations around staffing with a marked pull-back in hiring, causing employment to fall in December at the fastest rate since the global financial crisis in 2009 if the pandemic is excluded.

“While the December PMI is indicative of the economy more or less stalled in the fourth quarter, the loss of confidence and increased culling of jobs hints at worse to come as we head into the new year.”

Daniel Mahoney, economist at Handelsbanken, said: “There now seems to be growing evidence that firms are responding to the increase in employer’s NI and other measures around employment with a reduction in hiring.”

He said the data added to pressure on the Bank of England not to cut interest rates quickly. “This backdrop leaves the Monetary Policy Committee (MPC) with a difficult set of trade-offs, with the rate-cutting cycle likely to continue at a very cautious pace. Our central view remains that rate cuts will only happen at a pace of just one 0.25pp reduction per quarter through 2025”

Thomas Pugh, economist at RSM UK, said: “There was the clearest signal yet that firms were responding to the increase in labour costs by slowing hiring.”

He said rising costs in the UK services sector would make the Bank of England wary about cutting interest rates: “The MPC is now facing that nasty trade-off between slow growth and rising inflation, which will force it to cut interest rates only gradually next year. An early Christmas present on Thursday from the MPC seems very unlikely.”