UK firms have significantly depleted the large cash reserves accumulated during the COVID-19 pandemic, heightening the risk of job cuts as Labour’s forthcoming tax increases take effect in April.
During the pandemic, businesses had bolstered their savings by over £150 billion, supported by government loans and extensive public-sector assistance. This amount was nearly double their quarterly wage expenses, a Bloomberg analysis of government data shows.
However, these additional funds have largely been consumed, with companies using them to manage inflationary pressures and substantial pay increases, including hikes in the minimum wage and rising borrowing costs.
The savings-to-payroll expenditure ratio has now reverted to the pre-pandemic figure of slightly over 1.5.
Matt Swannell, chief economic adviser at the EY ITEM Club, compared this reduction in corporate savings to the dwindling excess household savings experienced last year due to high inflation.
He noted that companies are finding it increasingly challenging to retain staff as their financial buffers shrink.
The strain increased when Chancellor of the Exchequer Rachel Reeves announced a significant payroll tax increase of approximately £26 billion annually in her October 30 budget, despite protests from the business sector. Reeves confirmed the tax hike will proceed in April, attributing the necessity to a £22 billion deficit left by the previous Conservative government.
The prospect of rising national insurance contributions and a third consecutive annual increase in the minimum wage, both due in April, has already prompted companies to begin reducing their workforces.
The rate of job cuts in December and January accelerated to levels not seen since the financial crisis, barring the pandemic period, according to a recent S&P Global purchasing management survey.
In a related development, supermarket giant J Sainsbury Plc announced the elimination of 3,000 jobs, including a 20% cut in senior management positions, and the closure of all its in-store cafes.
