Rising employment costs have significantly eroded confidence among the UK’s smallest businesses, according to the latest research from the Federation of Small Businesses (FSB).
The FSB’s Small Business Index revealed that confidence fell sharply into negative territory during the second quarter of the year, with soaring wages cited as the primary driver of this decline.
The index, which surveys over 1,000 small businesses, recorded a confidence score of -10.8 for the three months ending in June, a substantial drop of 16.3 points from the previous quarter. This downturn highlights the growing financial strain on small business owners, who are grappling with the highest employment costs on record. The survey also identified weaker consumer demand and rising tax pressures as additional barriers to growth.
Tina McKenzie, the FSB’s policy chair, expressed concern over the impact of rising labour costs, warning that ‘they could stifle economic growth and lead to a reduction in small business job numbers’. She also voiced apprehension about the ‘government’s upcoming employment law changes’, which she fears could increase the risks and costs associated with hiring staff for small businesses.
Labour’s proposed overhaul of workers’ rights could further exacerbate these challenges, potentially adding to the financial burden on employers. McKenzie called on the government to index the employment allowance to the rising living wage as a measure to alleviate the pressure on small firms and address the ongoing economic inactivity crisis. She emphasised the need for a thorough review of all government employment policies to ensure they do not negatively impact growth and jobs.
The FSB’s report also highlighted sector-specific struggles, with the construction industry emerging as the least optimistic, recording a confidence score of -20.7. The wholesale and retail sector followed closely with a score of -19.5, a significant decline from its previous positive outlook. The accommodation and food services sector also saw a drop in confidence, sliding to -15.9 points from -11.8 in the prior quarter.
Manufacturing, which had been the most optimistic sector in the first quarter with a positive score of 19.2, experienced the most dramatic decline, plunging to -12.7 in the second quarter. Meanwhile, the information and communication sector saw its confidence fall to -9.2 points, and the professional, scientific, and technical sector dropped to -2.6 points, making it the least negative among the major sectors.
McKenzie underscored the need for more targeted support, particularly for the struggling construction sector, where confidence has hit a new low. She advocated for reforms, including changes to the consumer infrastructure levy, to help small building firms secure the financing necessary to sustain their operations.