UK Businesses Exhaust Cash Reserves, Raising Job Cut Risks Amid Tax Hikes
UK businesses have depleted their substantial pandemic-era cash reserves, increasing the likelihood of job cuts as Labour's tax increases take effect in April.
Companies accumulated over £150 billion ($185 billion) in savings during COVID-19 restrictions, aided by loans and government support. Bloomberg analysis of official data reveals that corporate reserves peaked at nearly double their quarterly wage bills.
However, most of these excess reserves have now been depleted as businesses tapped into them to cover inflation-busting pay rises and rising borrowing costs. The ratio of savings to payroll bills has returned to pre-pandemic levels of just over 1.5.
"This is the corporate equivalent of households' excess savings being eroded by high inflation last year," explained Matt Swannell, chief economic adviser to EY ITEM Club. "With some reserves, it's easier to retain staff even at a cost. But when savings deplete, it becomes more challenging."
Businesses have voiced concerns after Chancellor of the Exchequer Rachel Reeves announced a £26 billion annual payroll tax increase in her October budget. Despite the previous Conservative government leaving a £22 billion fiscal deficit, Reeves has affirmed that the tax hike will proceed in April.
Companies have already begun reducing headcount in anticipation of not only the increase in national insurance contributions but also a consecutive minimum wage hike. According to a purchasing-management survey released by S&P Global, the pace of job cuts in January and December was the highest since the financial crisis, excluding the pandemic period.
Supermarket giant J Sainsbury Plc recently announced the elimination of 3,000 jobs, including a 20% reduction in senior management, and the closure of all in-store cafes. HM Revenue & Customs data indicates that private-sector employers have shed over 150,000 employees since Labour took office in July, including 70,000 since the budget. Hospitality, retail, and manufacturing sectors have experienced the largest job losses.
As Reeves prepares to address economic growth in a major speech this week, the negative economic outlook poses challenges. The UK economy has contracted since Labour came to power, putting pressure on the Bank of England to lower interest rates. Alan Taylor, the Bank's newest rate-setter, has warned of a potential "hard landing" and recession if action is not taken promptly.
"There is potential for increased unemployment moving forward," added Swannell.