British Businesses Set to Cut Pay Awards

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 reported that 69% of employers surveyed 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 indicated they were “extremely likely” to slow their pay increases.

This 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 expect the central bank to cut interest rates by a quarter point next week, but the outlook for the rest of the year remains less clear.

A separate survey from the Confederation of British Industry revealed that companies were only slightly less pessimistic about the upcoming three months compared to December. The CBI’s growth indicator, which measures expectations in manufacturing and services, increased marginally 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,” stated Alpesh Paleja, interim chief economist at the CBI. “This, along with plans to cut staff and raise prices further, poses an increasingly awkward trade-off for policymakers.”

Reeves has declared her tax increases a one-off measure aimed at stabilizing public finances while funding services and investments. She is expected to deliver a speech this week outlining strategies to accelerate Britain’s sluggish economy.

One third of employers in the IDR survey expressed intentions to make redundancies, while 45% indicated they would mitigate the impact of tax increases through reduced profits or other means.

IDR also noted that 37% of employers planned to award pay rises of between 2.0% and 2.99% this year, while 43% anticipated pay rises between 3.0% and 3.99%. Only 14% expected pay rises of 4% or more, which may relieve the BoE’s concerns about lingering inflation pressures.

The IDR surveyed 168 employers, covering 1.2 million workers between November and December. The CBI report included 990 companies surveyed from December 19 to January 14.