UK Business Secretary Acknowledges Budget May Squeeze Hiring

Posted by Admin November 1, 2024 Bussiness

(Bloomberg) — UK Business Secretary Jonathan Reynolds accepted that tax hikes announced in the government’s budget this week might hinder companies’ ability to hire workers and raise salaries.

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Reynolds, speaking to Bloomberg Television, said the rise in employer national insurance contributions and an uplift in the minimum wage would affect companies, including how many people they employ and what they can pay them. Nevertheless, he defended Chancellor of the Exchequer Rachel Reeves’ budget.

“If you look at the overall tax position within the UK, if you benchmark some of these changes that we’ve had to introduce, there is no doubt the UK is still a globally competitive market,” Reynolds said. “Where you have any kind of pressure on business, of course, that will ultimately be something which affects how that business operates, what they can do in terms of recruitment and pay. We accept that.”

He spoke before the open of UK markets, when a selloff of UK government bonds resumed, reinforcing the challenging outlook for the government as it seeks to persuade investors that it’s restoring stability to the British economy after years of uncertainty under the Conservatives.

Prime Minister Keir Starmer’s government has spent its first few months in office trying to convince global investors the UK is a desirable location. It held an international investment summit and appointed former Darktrace Chief Executive Officer Poppy Gustafsson as investment minister.

Reeves unveiled the new Labour government’s first budget on Wednesday, including £40 billion ($51.6 billion) of tax hikes she said are necessary to strengthen the UK’s fiscal position. But her plans to ramp up spending and investment led to official projections suggesting around an extra £142 billion of borrowing will be needed over the next five years, unnerving the bond market.

The chancellor on Thursday tried to reassure markets by saying in an interview with Bloomberg Television that the government’s “No. 1 commitment” is to “economic and fiscal stability.”

But yields continued to rise on Friday morning, with the yield on the two-year bond up about 3 basis points and the 10-year up 4 basis points at the market open. The two-year yield is on track for a 10th day of increases, the longest streak since 2006.

Businesses were also unsettled by the budget, in which Reeves raised the national insurance payroll tax levied on employers, and increased the national living wage. UKHospitality, a trade body, said the increased burden on employers “will make it harder for businesses to support employment and invest in their businesses.”

Supermarket chain Tesco, the country’s largest private-sector employer, faces a cost rise that’s equal to about 4% of 2026 consensus earnings, according to analysis from Bloomberg Intelligence.

Reynolds said Labour, which took over from Rishi Sunak’s Conservative Party in July, had been put in a “very challenging position” by the previous government. The Tories failed to budget enough for day-to-day spending, he said.

Reeves’ deputy, Darren Jones on Friday morning also defended the budget. He told Times Radio that the tax-raising measures were necessary to fund a “broad package of interventions” to boost growth in the UK, and dismissed movements in the gilts market as “normal.”

Reynolds spoke to Bloomberg in Dubai. He’s in the United Arab Emirates to address trade ministers of the Gulf Cooperation Council, as the UK attempts to get a free trade agreement with the bloc. It’s his second visit to the Gulf since Labour won the general election.

“We see a real opportunity here, a real partnership that is very strong,” he said. A trade deal can “substantially improve on that.”

The oil-rich UAE is enjoying a boom, with its population rising rapidly as hedge funds and artificial intelligence firms move to or increase their staff in Dubai and Abu Dhabi. The latter, the capital of the UAE, has more than $1 trillion of sovereign wealth fund capital.

Still, there are some UK-UAE tensions. Last month, Labour was forced to appease Dubai-owned business DP World after it threatened to pull out of the UK’s investment summit. That was after the UK’s transport secretary criticized the employment practices of P&O Ferries, a DP World subsidiary. The Dubai company ultimately took part in the summit.

Reynolds said there would “always be a need for dialog” over such issues, but that the UK did not “conduct explicit foreign policy questions through our trade negotiations.”

“We should never dodge difficult questions if they need to be had through proper dialog and understanding,” Reynolds said. “But we should also be making the case that bringing economies around the world together is in itself a good thing.”

(Adds bond markets starting in fourth paragraph; context throughout.)