Two major surveys show business owners losing faith in the UK economy. Rising energy costs, record borrowing costs and the threat of new tax rises in the 28 October Budget are behind the fall.
UK business confidence has fallen to its lowest level in 17 months. Firms are bracing for more tax rises when Chancellor John Healey delivers his first Budget later this month.
Lloyds Bank’s monthly Business Barometer found that confidence fell 12 points to 41% in September, the weakest reading since April 2025. A separate survey from the Institute of Directors (IoD) suggests investment plans are already being shelved. Some 65% of business leaders said they were pessimistic about the UK economy, and more than 70% plan to freeze or cut investment over the coming year.
Energy costs and global uncertainty
Lloyds says the fall was driven mainly by firms becoming gloomier about the wider economy. Economic optimism fell 18 points to 31%.
Hann-Ju Ho, senior economist at Lloyds Commercial Banking, said the fall was driven by rising global energy prices and increased global uncertainty.
Sentiment had improved over the summer as fighting in Iran eased. The conflict has intensified again over the past month, pushing up energy costs just as the Budget comes into view. Smaller businesses have been hit hardest. Confidence among firms with turnover under £5m fell 14 points to 39%, while larger companies held up better.
Tax, uncertainty and weak demand
For many owners, the Budget is now the main worry. The IoD found that major spending plans from Prime Minister Andy Burnham, together with the Government’s failure to rule out tax raids on business, were adding to firms’ concerns.
“The biggest factors having a negative impact on their growth are tax levels, policy uncertainty and weak demand,” said Anna Leach, chief executive of the IoD. “Those things look like they are going to get worse as the year progresses.”
Leach said business leaders had noticed “the absence of confirmation that business costs will go down or at least be stable in the Budget” at the Labour Party Conference. She also pointed to large increases in the minimum wage for younger workers, which she said are making it more expensive to take on staff and are hurting young people’s job prospects.
Calls for ‘breathing space’
Business groups broadly welcomed the Prime Minister’s growth ambitions in his conference speech, but they want something concrete in return. Rain Newton-Smith, chief executive of the Confederation of British Industry (CBI), said firms must be given “breathing space from the cumulative cost pressures holding back investment and hiring”.
The City was less impressed. Kallum Pickering of Peel Hunt said the speech showed a “total absence of market-friendly or genuinely pro-growth initiatives”.
Many firms have already absorbed higher employer National Insurance, repeated minimum wage rises and a wave of new workers’ rights. They are hoping the Budget doesn’t add more.
A Treasury spokesperson said the Chancellor “recognises that the cost of doing business has grown since the pandemic” and is “providing a bit of breathing space where we can, to help firms grow, create jobs and drive growth in every postcode”.
Healey’s room for manoeuvre is shrinking
How much the Chancellor can offer is another matter. Yields on ten-year gilts have climbed above 5.4%, close to their highest level since 2007. A recent auction sold £4.25bn of ten-year gilts at the highest yield since 1999.
Economists at Deutsche Bank estimate that Healey has only around £8.5bn of headroom against the Government’s fiscal rules. That leaves little room to fund new spending without raising taxes. Burnham has said he does not plan to raise taxes to pay for a new national care service and would instead fund it by scrapping the state pension triple lock.
Red tape and tighter credit
There are other pressures too. The Recruitment and Employment Confederation (REC) warned that new rules in the workers’ rights plans could require employers to check the legal status of workers across their supply chains.
“We fully support a tighter grip on illegal working,” said Lorraine Laryea, the REC’s chief standards officer, “but our concern is that the plans cast the net far wider than necessary.” She warned of “more red tape, slower recruitment and fewer opportunities for jobseekers”.
Finance is also getting harder to come by. EY expects bank lending growth to slow from 3.6% last year to 2.9% this year and 2.2% in 2027. It expects business borrowing growth to halve this year as firms become more cautious about investment.
What it means for your business
With the Budget weeks away, owners can reduce the risk of a nasty surprise. Model your cash flow against possible changes to employment costs and business rates. Review pricing early rather than absorbing rising energy and wage bills, and fix supplier and energy costs where you can. Waiting for clarity on big commitments makes sense, but putting all growth plans on hold could leave you behind once things settle.
