Higher prices and more AI: how businesses plan to cope with Reeves’s budget

Chris Greenough has rarely been busier. As managing director of a thriving Telford sheet metal business, he has a healthy order book to service, 80 staff to manage and the ever-present drive to find new clients.
But since the shock of the Halloween budget’s increase in his employers’ national insurance (NI) bill and a hike in the minimum wage, he has yet another big job to do: figuring out how to make the savings at CEL Sheet Metal to cover the extra £4,000 a month the chancellor has just added to his payroll bill.
“I’ve just finished crunching the numbers, so now we’ve got to find ways of mitigating the extra costs,” he says, taking some time out from the busy shop floor.
Companies big and small across the UK have spent the past ten days calculating how big the hit will be — and figuring out how to cope with it. Some are looking at cutting workers or trimming bonuses, others have put expansion plans on hold. Those who can will be putting up prices.
As the chief executive of one major retail chain facing extra employers’ NI and minimum wage bills of more than £90 million put it: “We’ve figured out what the impact on our NI bill is. The next question is how much it’s going to cost our suppliers, and whether they’re going to pass that on to us. Whatever happens, there’ll be a big review of our budgets in the next few months.”
Big businesses on the stock market spent last week informing their shareholders of the expected hit, with Sainsbury’s, Marks & Spencer and BT all saying the bill would land north of £100 million.
Sainsbury’s is expected to increase prices after its chief executive, Simon Roberts, said that, with 3 per cent profit margins, “there just isn’t the level of capacity to absorb” the £140 million of extra NI costs his business faces. Marks & Spencer, which has fought a years-long internal battle to get prices down to compete with the likes of Zara and H&M, is expected to seek further efficiencies elsewhere in the business rather than raise its prices.
At CEL Sheet Metal, Greenough is planning more investment in technology to make his business more efficient. “It’s not great that business is being hit like this, obviously,” he said. “But the good news is that at least now we know what the costs are going to be, and that we’ve got until April next year to do something about it.”
He has already been using generative AI to make his existing workforce more productive and is considering using more robotic technology for jobs such as welding.
“In Britain, we’re really good at inventions and ideas, but we’re not always great at adopting things like AI,” he said.
He’s not wrong. According to the International Federation of Robotics, the UK is not even in the top 20 of developed nations in terms of the ratio of robots to factory workers.
The pain from the budget may push companies here to remedy that. Mark Gray, UK managing director of Universal Robots in Sheffield, had just finished a sales meeting with a welding company looking to use his “cobots” (robots that work alongside humans) when he came up for air to chat.
He said: “In the last week, we’ve had 20 serious inquiries from all walks of life — manufacturing, welding, food, logistics. Typically, we’d get more like four or five.”
The machines cost from £20,000 to £45,000 and he claims they will pay for themselves in nine to 12 months on a daily eight-hour shift, or in three months if working around the clock.
“You could say we’re making it so difficult for ourselves with Brexit, the budget and so on, but that creates opportunities to boost our efficiency,” he said. “Other EU countries have been there already. Now it’s our turn.”
Britain’s towering service sector has a far better record than our manufacturers of investing in technology. But the new employment costs springing from the budget are likely to galvanise bosses to push staff further. A partner at one major accounting firm said his department was trying to use AI to do all the “grunt work” traditionally done by new graduates. “There’s an informal target to replace all the work that grads do in their first two years on the job,” he said. The budget will only accelerate that process, he added.
In the retail and hospitality industries, where customers demand the human touch, automation is harder to implement. Shops, pubs and restaurants have been finding it hard to figure out ways of offsetting the burdens of the budget.
Those employing fewer than four workers (or the part-time equivalent) will not have to pay any employer’s NI. But they are still hit by the increase in the minimum wage and — worse still — an effective doubling of their business rates as the Covid-era relief drops from 75 per cent to 40 per cent.
The government had said it would be reforming business rates, but beyond some tinkering and another “review”, this did not happen. One FTSE-100 company’s government-relations director described a sense of “betrayal”, saying: “Labour promised fundamental reform to rates, both in their manifesto and privately with us behind closed doors. So when the leaks started about an employers’ NI increase, we thought: ‘OK, if that’s the compromise for business rates reform, so be it.’ But then on budget day, they gave us nothing on rates, and shocked everyone by lowering the thresholds for NI, which made it way worse than anyone had expected.”
Under those new thresholds, employers have to start paying employers’ NI when the worker’s pay gets to £5,000, rather than £9,100 as before.
That means even part-time workers fall into the employers’ NI bracket. As a result, the biggest burden is being borne by supermarkets, high street retailers and hospitality companies providing employment for thousands of students and carers only wanting a few hours’ work a week.
Andrew Murphy, chief executive of The Entertainer, a 166-strong chain of toy shops, said businesses such as his with small high street outlets were particularly badly caught. They tend to need one employee in the shop on the till and another “out the back”, he explained. That makes it more practical to have two employees doing 20 hours a week than one on 40. Under the old thresholds, those part-timers would not earn enough to fall into the employer’s NI bracket, but now they will. “The cost for us of employing someone on 20 hours a week will basically just go up 200 per cent,” Grant said.
He had been planning to open two new shops, investing £500,000 in each and employing 15 or 16 staff apiece, but is now putting those plans on pause. “We’d done the viability assessments and decided to do it, but the chancellor changed some of the key lines in that calculation,” he said. “We’ve had to rethink.”
Lucy Burton, speaking from her restaurant, Mannion & Co, in the picturesque market town of Helmsley, North Yorkshire, is also scaling back expansion plans. “There’s only a certain amount of money you can charge people, especially in the northern area… Do we recruit more? I suppose the answer is going to be no. Do we look at expanding? We want to, but now we’re going to have to wait for the dust to settle.”
Smaller business owners said they were beginning to realise they have few options but to work longer hours themselves, so as to cut their staff numbers.
Isla Coole, who set up the crime and mystery bookshop Criminally Good Books, in York — a favourite haunt of Rebus author Sir Ian Rankin, no less — is still trying to figure out how to respond. With book prices largely set by the publishers, she cannot pass on her extra costs to customers. “It may mean owners [like me] working more hours and employing fewer staff, or it may mean downsizing premises to make up for the reduction in business rate relief,” she said.
She mused that some employers might encourage workers to declare themselves self-employed to avoid the NI bill, but tax experts warned that risked falling foul of HM Revenue & Customs officials hunting for “abuse”.
People running businesses are born problem-solvers, however. In the past four years, they have been through the coronavirus pandemic, the energy price shock and sky-high interest rates. They will doubtless figure out ways to absorb their newly increased tax bills, perhaps emerging as more efficient operators at the end of it.
But quite how they will also deliver on Rachel Reeves’s ambition of bringing back growth to the economy is hard to see.