Budget drives ‘dramatic’ drop in business confidence, ICAEW finds

Confidence across all UK business sectors has plunged to 0.2 for Q4 2024 as concerns over last year’s Budget tax measures weigh “heavily” on the economy, according to ICAEW analysis.

UK business confidence fell by the largest amount in two years, amid “record tax concerns and sluggish domestic sales growth”, according to ICAEW’s Business Confidence Monitor (BCM) Q4 2024.

This is the weakest reading since Q4 2022 and down from 14.4 in the previous quarter.

The BCM also found that companies expect investment growth to slow in the coming year, signifying an “overall dip in sentiment”. Although inflation has slowed and interest rate cuts are expected soon, most economic indicators suggest that the economy is “unlikely to see significant improvement anytime soon”.

Additionally, the number of businesses reporting the tax burden as a growing challenge hit a record high at 41% in Q4, a significant increase on Q3’s 29% and the first time that tax worries have been the most cited challenge in the BCM’s history.

Concerns were partly a reflection of changes to employers’ national insurance (NI) in the Budget, which ICAEW members said would have a negative impact on margins. The reduction in the NI threshold also came as a particularly “unwelcome surprise”, ICAEW said.

Domestic sales growth slowed to 3.2% in the quarter, the lowest since Q3 2021 and down from 3.8% in Q3, likely to be as a result of wider economic conditions and concerns over the impact of October’s Budget. Export growth ticked up to 2.8% quarter-on-quarter, but remained below the historic average.

Selling price inflation also slowed to its lowest level since Q1 2022 and is expected to slow further in the next 12 months, businesses reported.

Salary growth slowed to 3.1% year-on-year, the lowest rate for more than two years but still double the pre-pandemic average. Notably, wage growth in the next 12 months is expected to slow to its lowest level since Q4 2021.

Businesses reported that their input costs slowed to 3.7%, down from 4.2% in the previous quarter and the lowest since Q4 2021. However, companies lifted their expectations for cost inflation in the year ahead, likely due to the expected impact of the Budget and greater global uncertainty.

Against this backdrop, just 11% of businesses cited bank charges – including interest rates – as a challenge in Q4, the lowest since Q1 2022. ICAEW said that this was probably “a reflection of the expectation of continued rate cuts from the Bank of England this year”.

Lastly, companies reported capital investment growth of 2.6% in Q4, above the historic average of 2.1% and up from 2.4% in Q3. Businesses said that they planned to boost investment by just 1.8% in the next year, with capital investment spending set to be strongest in the energy, water and mining sector and weakest in construction.

Alan Vallance, ICAEW chief executive, said: “It’s little surprise that business confidence has fallen considerably. The costs of October’s Budget fell almost solely on business and, as this survey makes clear, our members have expressed concerns about measures that place additional costs on those they support and the wider economy.

“We want Britain to be the best place to invest and to start, run and grow a business,” Vallance continues. “To achieve this, it’s vital that the government delivers on its mission to promote economic growth. We hope the government will prioritise measures to boost the wider business environment and provide businesses with the clarity and stability they need.”