In the run-up to Rachel Reeves’ second budget, British companies cut their workforces at the highest rate in more than three years, as months of tax speculation paralyzed hiring decisions and pushed employers into contraction mode.
New figures from the Bank of England show private sector employment fell by 1.8% in November – the biggest monthly fall since July 2021. Finance directors told the bank they also expect to reduce their workforce by an average of 0.7% next year, marking the biggest planned fall since October 2020.
The data shed clear light on the chilling effect Westminster’s pre-Budget uncertainty had on the UK labor market. Companies faced nearly six months of rolling briefings pointing to big tax rises, culminating in Reeves’ £26bn tax package unveiled last week.
Rob Wood, chief UK economist at Pantheon Macroeconomics, described the figures as evidence of “slumping job growth caused by chaotic speculation about tax rises ahead of the Budget”.
HMRC data suggests the same trend. The number of employed people fell by 180,000 in the year to October – the first annual decline outside the pandemic in a decade.
Already in July, there were indications of impending tax increases. In early November, Reeves publicly signaled she was willing to break Labor’s election promise and raise income tax – before abruptly dropping the idea amid internal revolts and market turmoil.
The resulting confusion froze investment and hiring plans. Multiple business surveys have shown significant falls in recruitment since its first budget in October 2024, when it introduced a £25 billion payroll tax as part of wider £40 billion increases.
By contrast, last week’s budget focused largely on raising consumer taxes, including extending the income tax threshold freeze – a move that will ultimately push one in four workers into the 40 percent bracket.
The Bank of England survey also found that wage pressures remain stubborn. Companies increased wages by 4.6% in the year to November, up from 4.2% in October. Wage increases are expected to moderate to 3.6% next year as the economy slows.
Companies plan to raise prices by an average of 3.5% next year – slightly below the October forecast of 3.7% but still well above the bank’s inflation target.
But despite signs of persistent inflationary pressures, Wood said the deteriorating labor market had “hit the nail on the head for a rate cut in December.” Investors expect the bank to cut interest rates to 3.75% on December 18 after easing them from 5.25% for a year.
The Office for Budget Responsibility used last week’s budget to predict that inflation would fall faster next year, helped by Reeves’ removal of taxes from household energy bills. The CPI rate fell from 3.8% in September to 3.6% in October.
At the moment, however, the labor market is in the red – and the economic consequences of a turbulent period before the budget draft are likely to be felt well into 2026.
