British businesses shed staff at the sharpest rate in more than three years in the run-up to Rachel Reeves’s second budget, as months of swirling tax speculation paralysed 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 steepest monthly drop since July 2021. Finance directors told the Bank they also expect to reduce their workforces by an average of 0.7% over the next year, marking the biggest planned decline since October 2020.
The data shines a stark light on the chilling effect that Westminster’s pre-budget uncertainty has had on the UK labour market. Businesses faced almost six months of rolling briefings hinting at major tax rises, culminating in Reeves’s £26bn tax package unveiled last week.
Rob Wood, chief UK economist at Pantheon Macroeconomics, described the figures as evidence of “collapsing job growth driven by chaotic pre-budget tax hike speculation”.
HMRC data points to the same trend. Payrolled employment fell by 180,000 in the year to October – the first annual decline outside the pandemic in a decade.
Hints of impending tax rises began circulating as early as July. By early November, Reeves had publicly signalled she was ready to break Labour’s manifesto pledge and raise income tax – before abruptly dropping the idea amid internal revolt and market jitters.
The resulting confusion froze investment and hiring plans. Several business surveys have shown sharp recruitment pullbacks since her first budget in October 2024, when she introduced a £25bn payroll tax as part of £40bn in wider hikes.
In contrast, last week’s budget focused mainly on raising taxes on consumers, including extending the freeze on income-tax thresholds – a move that will ultimately push one in four workers into the 40% bracket.
The Bank of England’s survey also revealed that wage pressures remain stubborn. Businesses raised pay by 4.6% in the year to November, up from 4.2% in October. Pay rises are expected to cool to 3.6% next year as the economy slows.
Firms plan to increase prices by 3.5% on average next year – slightly below October’s 3.7% projection but still well above the Bank’s inflation target.
Yet despite signs of persistent inflationary pressure, Wood said the labour market deterioration “nailed a December rate cut”. Investors expect the Bank to cut interest rates to 3.75% on 18 December, following a year-long easing from 5.25%.
The Office for Budget Responsibility used last week’s budget to predict that inflation would fall faster next year, helped by Reeves removing taxes from household energy bills. The CPI rate dipped to 3.6% in October from 3.8% in September.
For now, however, the jobs market is flashing red – and the economic fallout from a turbulent pre-budget period looks set to be felt well into 2026.
