Government under pressure on economy as British households anticipate worsening finances

The government is under growing pressure to get momentum back into the economy amid warnings that businesses plan to cut jobs and raise prices, while millions of families believe their finances will worsen this year.

Before a major speech this week by the chancellor, Rachel Reeves, designed to restate Labour’s commitment to improving the economy, the CBI said private sector firms were urgently assessing their budgets to offset measures announced in last October’s budget.

The lobby group said it expected another “significant fall” in business activity over the next three months. This measure has now been flat or falling since mid-2022, when Liz Truss was briefly prime minister.

Alpesh Paleja, the interim deputy chief economist at the CBI, said: “After a grim lead-up to Christmas, the new year hasn’t brought any sense of renewal, with businesses still expecting a significant fall in activity.

“There is an urgent need to get momentum back into the economy. The government can help shift the UK’s economic narrative with more determined focus on measures that could drive growth.”

Business leaders have said they will need to take action after the chancellor’s autumn budget included a £25bn increase in employer national insurance contributions (Nics) and a 6.7% rise in the minimum wage.

In a gloomy start to the year, analysts have said the Bank of England will have limited capacity to cut interest rates amid early signs of rekindling inflation pressures even as firms cut jobs and economic activity stagnates. Financial markets expect Threadneedle Street to cut borrowing costs by 0.25 percentage points to 4.5% at its next policy meeting on 6 February, and make just one more cut by the end of the year.

Highlighting the pressure on households from rising prices for energy and vital essentials, as well as elevated borrowing costs, the debt charity StepChange said 21 million people had been bracing for a hit to their finances.

Publishing a survey of more than 2,000 adults across Great Britain, it said 41% – equivalent to 21.3 million people – expected their financial situation to worsen over the next 12 months. It said meeting the cost of living and higher energy bills was a significant factor driving this sentiment.

Vikki Brownridge, the chief executive at StepChange, said: “It’s clear that millions of people across the UK are feeling the weight of financial uncertainty. The cost of living, including stubbornly high energy bills, continues to impact families, individuals, and communities, with particular strain being felt by women and those with parental responsibilities.

“What’s concerning is how many are facing worries about their finances going into 2025, even more so than this time last year. These challenges are not temporary. They reflect the long-term financial pressures many are facing – and without the right support, it’s only going to get harder for people to manage their finances.”

The government is coming under pressure to support businesses and households after economic growth stagnated in the entire second half of 2024, while inflation has returned back above the Bank of England’s 2% target in recent months.

The consulting firm EY-Parthenon said that one in five UK-listed companies had issued profit warnings last year – the third-highest count in 25 years, behind only 2020 at the height of the Covid pandemic, and 2001 after the dotcom bubble burst and the 9/11 attacks.

Publishing a report on Monday finding that 274 profit warnings were issued by UK-listed companies last year, Jo Robinson, a partner at EY-Parthenon, said the most common reasons were order cancellations or delays, as well as rising costs.

Highlighting the rise in employer Nics and minimum wage increase, she said: “Across the board, the road ahead remains rocky with challenges around trade, geopolitics, interest rates, and more.”