Why Scottish business is fearful ahead of Labour’s Budget

Of the hundreds of businesses surveyed by the Scottish Chambers of Commerce, four out of the five industry sectors reported a fall in profits, with only services showing an increase but well down on the same quarter last year.

Construction, manufacturing, retail and tourism were all down and pressures on cashflow and profit margins are limiting and squeezing growth.

The survey, carried out in partnership with the Fraser of Allander Institute, reflected the constant flow of negative messaging on the forthcoming Budget.

Whilst we recognise the fiscal pressures on public finances facing Chancellor Rachel Reeves, the repeated warnings over tax rises and tough financial decisions are directly impacting business confidence and curtailing investment.

It compounds the lack of action and support to help ease cost pressure, restore confidence and incentivise investment in the first 100 days of the new Labour Government. That remains disappointing given the pre-election rhetoric which promised a government prepared to listen to, and work with business.

We understand that the fiscal backdrop is a challenge for the Chancellor Rachel Reeves but any changes made must not be at the expense of investment and growth. The solution does not lie in increasing the expense of doing business.

Economic growth and job creation can only come through working in partnership with business to overcome these challenges.

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Confidence is key and that applies to both businesses and employees with both impacted by the lack of money in the latter’s pocket. Negative changes to personal taxation, fuel duty, pension tax relief and the impact of fiscal drag will reduce disposable cash and lead to increased wage demands.

With fears of pay increases already flagged in the survey as the top cost pressure facing seven in 10 firms, it is little wonder we are apprehensive.

The autumn Budget needs to support business and address the issues which the business community has consistently flagged.

Chief among those worries is rising energy costs with concerns raised by more than half of firms surveyed. That comes at a time when next quarter will see the end of many longer-term energy deals and businesses facing hefty increases, including gas bills up 50%. To make matters worse it remains difficult to make investment decisions when there is a lack of clarity over the direction of taxation, particularly around the energy sector.

Businesses can’t plan or move forward without understanding future energy costs and the strategy to deliver a sustainable, fair and pragmatic transition to Net Zero.

We need to know the impact of any new tax burdens and fuel duties, as well as changes in legislation, on all businesses, large and small.

Whilst we await the UK Budget announcement with a certain amount of trepidation given the gloomy mood music, we will also be looking to December’s Scottish budget and seeking positive action to address business rates which remains a huge pressure on almost two-thirds of retail firms surveyed. The hospitality, tourism and leisure sectors, in particular, cannot cope with any further tax increases.

Half of businesses also reported major recruitment issues, particularly skills shortages, and while we broadly welcome the new UK Employment Rights Bill there are potential increases in costs and unintended consequences. With businesses already implementing many of the principles, providing enhanced conditions and offering flexible working models, the bill needs to ensure there is no increase in costs and changes are proportionate and sensible at a time when many firms are already struggling with higher wage bills and escalating costs.

Employment rights that are practical and relevant to the workplace should be good for employees and business. They must cater for both employees’ lifestyle and business needs and zero hours contracts is a potentially good option in some cases. Many businesses rely on these contracts to provide flexibility for staff and the business.

We are also concerned that introducing employment rights from day one fails to take cognisance of the workplace reality where both employee and employer need to be able to be the right fit for each other and the role. Having probation periods are key to providing timely assessments and for taking decisions – on both sides.

What will happen with energy costs? (Image: PA)

The proposed new rights to a tribunal access from day one will inevitably lead to more settlement agreements to avoid a lengthy and costly tribunal process, placing more burdens on businesses. All of this comes at a time when businesses are being held back by the inability to recruit experienced and skilled staff and the expense of securing and retaining them in a highly competitive market.

We hope a balanced and pragmatic approach will be right for both businesses and their employees and look forward to working with the Government on the practical details.

Additional pressures on the workforce can be eased by the Chancellor by unlocking targeted investment in training with skills aligned to business demand as well as a clearer international workforce strategy to help fill key skills gaps. And in Scotland there needs to be greater clarity and focus on the application of the Apprenticeship Levy which remains unfit for purpose yet could offer better incentives and more practical support where skills shortages are curtailing the ability of business to compete, expand and create more jobs.

Without delivering the workforce of the future our economy will stagnate as our worldwide competitors gain an advantage.

The Budget is a chance to kickstart the economy, reset the relationship with business and finally establish a partnership to create jobs and stimulate growth. We can only hope the Chancellor’s autumn statement doesn’t herald a winter of discontent.

Dr Liz Cameron  is Chief Executive of Scottish Chambers of Commerce