Rising Wage Costs Affect Confidence in Small UK Businesses

Morale among the UK’s smallest businesses has been impacted by increasing employment costs, recent research indicates.

The Federation of Small Businesses (FSB) reported that confidence among small business owners declined into negative territory in the second quarter, primarily due to higher wages.

According to the FSB, rising employment costs have significantly affected small business owners, marking a record high for cost increases compared to the previous year. Additional obstacles to growth include weaker consumer demand and tax pressures.

Tina McKenzie, policy chair at the FSB, expressed concerns that small businesses are apprehensive about the government’s upcoming changes to employment regulations, which could increase the risks and costs associated with hiring.

Labour’s planned overhaul of workers’ rights could also lead to higher expenses for employers.

The FSB’s small business index, which surveyed over 1,000 companies, showed a headline confidence reading of -10.8 in the three months ending in June, down 16.3 points from the previous quarter.

McKenzie warned that further increases in labour costs could hinder economic growth and potentially reduce small business job numbers, negatively affecting firms, staff, local communities, and the national economy.

She urged the government to formally index the employment allowance to the rising living wage to alleviate pressure on small firms and address the economic inactivity crisis. McKenzie emphasized the importance of scrutinizing the government’s employment plans for any negative impact on growth and jobs.

The FSB’s index revealed that the construction sector was the least optimistic, with a score of -20.7 points, followed closely by the wholesale and retail sector at -19.5 points, a decline from the 2.1-point increase in the first quarter.

Accommodation and food services businesses saw their score drop from -11.8 points to -15.9, while manufacturing companies experienced a significant swing from a positive 19.2 points in the first quarter to -12.7 points in the second quarter.

Information and communication sector firms fell to -9.2 points from 7.1 in the previous quarter, and professional, scientific, and technical businesses saw a decline from 14.3 points in Q1 to -2.6 points, making them the least negative of the major sectors.

McKenzie highlighted the construction sector’s challenges, with the lowest confidence reading among major sectors, reinforcing the call for more support for small housebuilders, such as reforming the consumer infrastructure levy to improve access to finance for small building firms.