Budget uncertainty sends economic activity down to lowest level in almost a year

Uncertainty surrounding the Budget knocked economic activity in October, according to a closely watched business survey, as firms delayed decisions in the face of possible tax changes.

S&P’s ‘flash’ purchasing managers’ index (PMI) came in at 51.7 this month, down from 52.6 in September and below expectations.

While the PMI remained above the 50 no-change mark, it was the slowest rate of expansion since November last year and equates to just a 0.1 per cent quarterly increase in GDP.

“Business activity growth has slumped to its lowest for nearly a year in October as gloomy government rhetoric and uncertainty ahead of the Budget has dampened business confidence and spending,” Chris Williamson, chief business economist at S&P Global Market Intelligence said.

Chancellor Rachel Reeves is reportedly looking to raise £40bn in the Budget, weighted heavily towards tax rises.

The Chancellor is likely to force employers to pay national insurance on pension contributions and may hike capital gains tax too. Other measures, such as closing inheritance tax loopholes and extending the freeze on income tax thresholds, are also under consideration.

Survey respondents noted that Budget uncertainty had “delayed decision-making” while companies reduced headcount for the first time this year.

While firms in the service sector saw solid growth in new business intakes, manufacturing firms saw an outright decline.

The survey also showed that business confidence fell for the third successive month, taking it down to its lowest level since November 2023. This adds to a growing body of evidence that concerns about the Budget has damaged confidence in the economy.

With the Budget only a week away, Williamson said it would play “a major role in steering the direction of the economy in the months ahead”.

The economy performed surprisingly well in the first half of the year, growing above the trend rate of growth, but it has slowed significantly in recent months.

Elias Hilmer, assistant economist at Capital Economics, said the economy might even be stagnant entering the final quarter of the year.

There was more positive news on inflation, with the cost burden facing firms rising at its slowest pace in 47 months. Where firms reported higher costs, it was largely due to higher salary payments and costs associated with new technologies.

Nevertheless, firms still increased their output prices at an accelerated rate, with prices charged inflation climbing to its highest level since July.

“A further cooling of input cost inflation to the lowest for four years opens the door for the Bank of England to take a more aggressive stance towards lowering interest rates, should the current slowdown become more entrenched,” Williamson said.