Britain’s Newest Fiscal Crunch

The hits just keep on coming for the United Kingdom. First, there was the crushing weight of the pandemic, quickly followed by last year’s inflationary surge. Now, there’s an extra burden that business leaders need to deal with: huge tax hikes.

Indeed, starting last April, corporation tax jumped to 25%, up from 19%. And for individuals, the top 45% tax bracket has been dropped to £125,140 ($159,000) from £150,000. Other personal tax brackets haven’t moved, meaning that people have less inflation-adjusted spending power. In short, the hikes present business leaders with some challenges.

The tax increases come as the government faces a fiscal crunch. The Treasury just made its thir-highest-ever interest payment on its debt. The hikes are partly due to rising interest rates. But they also reflect the hefty debt-funded spending splurge during the pandemic. “In a similar way to the global financial crisis, they had no option but to spend their way out of the pandemic,” says Grant Duncan, Korn Ferry’s sector lead for media, entertainment & digital in EMEA. 

Still, increasing government debt isn’t the only issue prompting tax increases. Britain’s inflation is running high at 6.8%, well ahead of the US’s 3.2% or the eurozone’s 5.3%. Those rising costs push up the bill for running government services, which ultimately needs to get passed on to taxpayers. While that’s harsh, it is designed to help steer the economy back to some form of normal. “To get this economy back under control and back in line, there need to be relatively drastic policies,” says Stuart Richards, sector leader, consumer products, in EMEA for Korn Ferry.

Still, the tax changes have business leaders on edge. They are being cautious about investing in new businesses and hiring. “They are acting pretty conservatively,” says Ben Frost, senior client partner for Korn Ferry’s Products business. In other words, few businesses are going on a spending spree any time soon.

While executive anxiety may be increasing, Britain’s business leaders are used to dealing with economic problems and are finding solutions. “They’ve been here before,” Duncan says. Part of the approach to dealing with the tumult involves hiring freezes and avoiding expensive marketing campaigns. Discounting product prices is also a mainstay of many companies. Effectively they are buying market share, which helps the company stay relevant when the economy returns to a better place.

The only thing that might be new for younger executives is the inflationary surge. To deal with that, Duncan says savvy leaders are putting an emphasis on smart marketing and product design. That means getting down into the nitty gritty of how products can be altered to reduce costs and present a better value proposition to consumers who are feeling the inflationary pinch. “It’s how you adjust and adapt in a granular way,” he says. "Small adjustments add up.”

There are other efforts by many leaders to rigorously enforce cost control along the supply chain, Duncan says. Experts say it’s a painful process, one which smart executives who want to maintain long-standing business relationships hope to share some of that pain. “You need to have robust conversations, and you need to be sympathetic to each other,” he says

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