UK employers target wage bill to offset tax hikes as gloom persists

By Andy Bruce

(Reuters) – A clear majority of British businesses look set to cut the size of pay awards for staff in response to coming tax hikes and they remain pessimistic about the outlook for the economy, two surveys showed on Monday.

Data provider Incomes Data Research said 69% of employers it canvassed were extremely or moderately likely to reduce pay awards to offset an increase in payroll taxes announced by finance minister Rachel Reeves in her first budget last October.

More than half of those respondents said they were “extremely likely” to slow their pay increases.

The survey sheds light on a key uncertainty facing the Bank of England ahead of its Feb. 6 interest rate announcement.

The BoE is trying to gauge whether employers will react to the tax hike by cutting jobs, wages or profits, or by raising prices.

Most investors and economists think the central bank is likely to cut interest rates by a quarter point next week but the picture for the rest of the year is less clear.

A separate survey published on Monday by the Confederation of British Industry showed companies were only slightly less pessimistic about the coming three months than they were in December.

The CBI’s growth indicator – which measures expectations among businesses across manufacturing and services, including retail – barely rose in January to -22 from a more than two-year low of -24 in December.

“After a grim lead-up to Christmas, the New Year hasn’t brought any sense of renewal, with businesses still expecting a significant fall in activity,” said Alpesh Paleja, interim chief economist at the CBI.

“Alongside plans to cut staff and raise prices further, this risks an increasingly awkward trade-off for policymakers.”

Reeves has said her tax increases are a one-off to put the public finances on a stable footing while raising funds for services and investment. She is expected to make a speech this week on her plans to speed up Britain’s slow economy.

One third of employers in the IDR survey said they were likely to make redundancies while 45% said they would absorb the impact of tax increases through reduced profits or other means.

IDR said 37% of employers planned to award pay rises of between 2.0% and 2.99% this year, while 43% predicted pay rises of between 3.0% and 3.99%. Only 14% expected 4% or more, offering some relief to the BoE which is worried about lingering inflation pressures in the economy.

IDR surveyed 168 employers covering 1.2 million workers in November and December. The CBI report covered 990 companies who were surveyed between Dec. 19 and Jan. 14.