UK Businesses Squeezed: Bailey Links Tax Hikes to Economic ‘Slack’

The Bank of England’s governor, Andrew Bailey, has directly linked the emergence of “slack” in the UK economy to higher taxes imposed on employers, a revelation that sent the pound tumbling. His comments suggest that recent fiscal measures, intended to bolster government finances, are having unintended consequences on the private sector, potentially necessitating more aggressive interest rate cuts from the central bank.
Bailey specifically referenced Rachel Reeves’s decision to increase taxes on employers, including a £25bn rise in employer national insurance contributions and a 6.7% increase in the national living wage. He observed that companies are “adjusting employment and hours and also having pay rises that are possibly less than they would have been if the [national insurance contributions] change hadn’t happened,” indicating a direct impact on business operations and wage growth.
Against this backdrop, the pound dropped to a three-week low, reflecting investor unease about the economic outlook and the potential for greater monetary easing. Money markets responded by significantly increasing the perceived likelihood of an August rate cut, now standing at 85%. This heightened expectation signals a growing consensus among investors that the Bank of England will indeed act to stimulate the economy.
The broader economic picture remains challenging, with official data showing the economy unexpectedly shrinking in both April and May. This contraction, coupled with a recent report from KPMG indicating the fastest drop in UK business hiring in almost two years, paints a worrying picture for employment and overall economic vitality. Bailey’s remarks underscore the delicate balance policymakers face in navigating these intertwined fiscal and monetary challenges.