UK companies are cutting jobs at the fastest rate since the first year of the pandemic, with the upcoming budget cost increases accelerating workforce reductions, according to new research from S&P Global.

The financial information services organisation reported that employment levels declined in February at the fastest pace since November 2020, as businesses prepared for rising payroll costs and subdued demand.

This drop aligned with a slight decline in the flash composite purchasing managers’ index, which fell from 50.6 in January to 50.5 in February, indicating a slowdown in output growth.

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Chris Williamson, chief business economist at S&P Global Market Intelligence, warned that the UK risked falling into a “stagflationary environment”, with data showing that, in February, business activity remained largely stalled for a fourth successive month, with job losses mounting amid falling sales and rising costs.

“The lack of growth alongside rising price pressures points to a stagflationary environment, which will present a growing dilemma for the Bank of England,” Williamson added, highlighting the dual challenge faced by policymakers.

While marginal output growth was eked out in February, order books deteriorated at a rate not seen since August 2023, suggesting that business activity could be reduced further in the coming months unless demand recovers.

Business costs are rising at a pace not witnessed since May 2023, with inflation accelerating for the fourth consecutive month, putting additional upward pressure on selling prices for both goods and services. The survey data suggests inflation could continue to rise beyond the latest uptick to 3 per cent.

“A key factor behind the upturn in inflationary pressures is the growing number of firms reporting the need to raise prices to help offset the impending rise in staff costs associated with the national insurance hike and uplift to the minimum wage announced in the autumn budget,” Williamson explained.

“However, companies also reported that the budget changes played a major role in driving intensifying job cuts. Employment fell sharply again in February, dropping at a rate not seen since the global financial crisis if pandemic months are excluded. One in three companies reporting lower staffing levels directly linked the reduction to policies announced in last October’s budget.”

Budget impact 

The spring budget, taking place on 26 March, is set to introduce a range of fiscal measures, including tax hikes and wage increases, posing significant challenges for businesses across various sectors.

Amid these economic headwinds, Hayley Saunders, HR technical consultant at AdviserPlus, has witnessed firsthand the transformation in recruitment as a result of increasing employer expenses. She said: “It’s inevitable that rising employer costs make hiring decisions more complex.”

Saunders pointed out that numerous organisations were now emphasising cost-saving strategies – such as recruitment freezes and workforce reductions – in anticipation of the effects of higher national insurance contributions and an increased minimum wage.

She said recent surveys revealed a wider pattern of diminished hiring confidence. Research conducted by the Recruitment & Employment Confederation indicated that roughly 14 per cent of employers had scheduled permanent headcount cuts between January and March 2025 – marking a 5 per cent rise compared to the figures observed in the three months before October 2024.

“Our own Empowering People Group survey found a startling four in five large UK enterprises plan to make large-scale redundancies in the next year,” Saunders continued. “So hiring confidence is understandably fragile.”

Recasting her findings into a broader context, Saunders said that although immediate cost-cutting measures might appear beneficial, they could ultimately worsen economic instability in the long run.

“Simply put, rising costs means fewer jobs, but focusing solely on short-term cost reductions will be detrimental, and widespread cost-cutting measures will only exacerbate the economic volatility,” she warned.

For further information, refer to the CIPD’s factsheet on improving employee turnover and retention