Tax hikes to derail UK economy at the final hurdle

Imposing punitive tax hikes on businesses will blow the UK economic recovery off course just as it is in touching distance of reaching pre-pandemic strength.

That’s the warning to Chancellor Rishi Sunak from economists and industry leaders after data from the Office for National Statistics (ONS) revealed Britain is inches away from full repair.

“Our economy is now within sight of its pre-pandemic size. To maintain an upward path, particularly as government support is phased out, it’s crucial that businesses should now have the confidence to invest,” warned Kitty Ussher, chief economist at the Institute of Directors (IoD), told City A.M..

Businesses are buckling under the weight of soaring energy costs, supply chain snarl ups stopping them from delivering normal services and rising staff costs, and tax hikes threaten to be the straw that breaks the camel’s back.

The 1.25 percentage point national insurance hike will stop around three in ten of them from expanding, which will anchor down economic growth, research by the IoD found.

“The cost of doing business is rising every day and as small firms try to navigate their way out of the pandemic we need to see more done to encourage growth,” MIke Cherry, national chair of the Federation of Small Businesses, told City A.M..

“Imposing further taxes on small firms who are the backbone of our economy is not the way forward.”

The UK economy returned to growth amid a boom in staycation spending and Brits making the most of an easing in self-isolation rules by rushing to pubs, bars and restaurants, the ONS said.

GDP expanded 0.4 per cent in August, a resumption to growth after July’s output was marked down July’s figure to minus 0.1 per cent.

The rebound was largely driven by the services industry receiving a bump from households choosing to holiday in the UK. Output at travel agents and tour operators soard 47.9 per cent over the last month.

The economy is still 0.8 per cent smaller than it was before the pandemic.

Although the recovery has slowed, it is unlikely to shift the dial on when the Bank of England hikes interest rates.

Robert Wood, chief UK economist at Bank of America, who published a research note this week that contributed to jolting financial markets into betting on a rate rise in December, told City A.M.: “The economy was partly held back by goods and labour shortages. If those continue too long even weak UK growth could mean above 2 per cent inflation and inflation expectations rising.”

“Some rate setters want to nip that risk in the bud.”