Rachel Reeves dealt massive blow as Bank of England exposes huge problem

Budget has come under more scrutiny following a new report by the exposing worrying trends in the UK economy. The Bank’s show, based on the current economic outlook, firms anticipate a significant slowdown in wage growth and employment over the next year.

Businesses expect wage growth to decline by 1.4 percentage points based on three-month averages, reflecting growing concerns over cost pressures.

They have also outlined various strategies to manage the rising employer contributions announced in the Autumn Budget, raising concerns about potential impacts on workers and consumers.

According to the Bank’s surveys conducted in November and December, 61% of firms plan to absorb the cost by lowering profit margins, while 54% intend to raise prices, exacerbating inflationary pressures.

Alarmingly, 53% of firms expect to reduce employment, and 39% foresee cutting wages compared to previous plans.

This bleak outlook aligns with current trends, with a monthly survey by advisory firm KPMG and the Recruitment and Employment Confederation highlighting a slowdown in recruitment activity across the UK.

The survey reflected the sharpest decline in permanent staff placements since since August 2023, with an index reading dropping from 40.7 in November to 39.5 in December.

George Holmes, managing director of business finance specialist , said: “The sharp decline in permanent job vacancies is yet more evidence of the difficult economic environment facing UK businesses.

“Rising employment costs, specifically the upcoming £25billion increase in National Insurance contributions, are making it harder for SMEs (small and medium-sized enterprises) to recruit and retain talent. Many small firms are being forced to delay hiring decisions or rely more heavily on temporary staff, which can hinder long-term growth and stability.

“Higher National Insurance contributions are placing a disproportionate burden on smaller businesses, which often lack the financial flexibility of larger organisations.”

He added: “These costs, combined with ongoing inflation and high borrowing rates, are stretching cash flow and making it even harder for SMEs to invest in the talent they need to thrive.”

The , as government borrowing costs surged, increasing pressure on Labour over its fiscal plans.

Sterling dropped nearly 1% on Thursday morning, reaching just under $1.23 – its weakest since November 2023 – amid a sharp sell-off in UK government bonds, known as gilts.

Yields on 10-year gilts, which reflect the cost of government borrowing, climbed by eight basis points to 4.89%, marking their highest level since 2008.

Economists have cautioned that the Chancellor may be forced to implement further tax hikes or spending cuts to comply with UK fiscal rules following the sharp rise in borrowing costs.

Kathleen Brooks, research director at XTB, said while still under pressure, the pace of the “relentless” bond sell-off had eased on Thursday.

But she stressed the pound’s reaction shows ongoing concerns in the market.

She said: “The UK’s fiscal position continues to look perilous. The Chancellor is expected to make a speech in the coming days, where she may focus on public sector spending cuts rather than further tax increases to meet her fiscal rules.”

The Chancellor committed last year to having only one fiscal tax-changing event a year, which is expected in the autumn, leaving many to expect that she will opt to rein in spending plans in her March fiscal statement.