High personal and business taxes are hampering the growth of companies in Aberdeen and Aberdeenshire, according to a new report.
Taxation has overtaken inflation and high energy costs as the biggest constraint facing companies in the region.
The North-east Quarterly Economic Survey, launched today by Aberdeen & Grampian Chamber of Commerce, in partnership with law firm Gilson Gray LLP, benchmarks key indicators in the region’s economy against the wider UK.
The report reveals that more than half of companies here (52%) believe that taxation has become a barrier to growth.
Four key findings will be outlined and discussed at a special Chamber Breakfast Briefing in Aberdeen this morning.
They are:
(1) RISING TAXES HAMPER GROWTH
For the first time since 2021, taxation has surpassed inflation as a constraint to growth for businesses in the North-east. 52% of companies polled listed it as a concern, up from 40% in the last quarter.
The windfall tax being extended is partly to blame, alongside changes in personal taxation announced by the Scottish Government in December which have now come into force.
Following changes which came into force this month, anyone who earns more than £28,850 will pay more in income tax than they would if they lived in England or Wales. Those who earn below the cut-off figure will pay less than they would south of the border.
The tax differentials grow sharply for those on higher incomes. Those on a £35,000 salary pay £61 more in Scotland than the rest of the UK. But the gap widens to £442 at £45,000; £1,696 at £55,000 and £2,096 at £75,000.
The new threshold, of 45% on earnings between £75,000 and £125,140 is also now in place, and the top rate, on salaries of more than £125,140, has jumped from 47% to 48%.
(2) INTERNATIONAL DEMAND CONTINUES TO GROW
More than a third of businesses (34%) think their international sales have increased over the past three months, continuing a trend of strong export trade for companies located in Aberdeen and Aberdeenshire.
Like the previous quarter, this is significantly ahead of the wider UK total (26%) and underlines the strong global demand for our produce, products and services.
(3) LABOUR MARKET REMAINS TIGHT
Three quarters of companies (75%) reported difficulties in recruiting staff during the first quarter.
Within the North-east there has been an increase in the number of businesses reporting difficulty in recruiting clerical and semi/unskilled roles.
Several comments touch on the difficulty of recruiting and retaining staff, the negative impact of visa policies on the movement of skilled workers, and challenges specific to sectors like seafood processing that relied on EU workers.
(4) INFLATIONARY PRESSURES EASING
Local businesses are reporting higher cost pressures on most measures than the UK as a whole, with a ten percentage-point difference in raw materials and utilities.
Within the data there are mentions of increased energy costs, higher wages leading to inflation, and the general rise in operational costs, including those due to doubling electricity contracts and increased rent.
However, fewer firms now list inflation as a constraint for growth, down from 56% last quarter to 38% this time around.
THE NATIONAL PICTURE
Nationally, the survey shows most firms reporting no improvement in investment levels, sales or cashflow in the first quarter of 2024.
After a slight rise in Q4, levels of business confidence have remained static. For the second quarter in a row, 56% of businesses say they are expecting an increase in turnover over the next year.
With inflation likely to remain volatile over the coming months – the data also reveals that more firms expect hikes in their own prices, with staffing costs being the main pressure.
REACTION TO THE FINDINGS
Russell Borthwick, Chief Executive of Aberdeen & Grampian Chamber of Commerce, said: “It is little surprise that taxation now tops the list of factors hampering growth among our companies.
“Many firms in the region operate within the oil and gas industry, which continues to be strangled by the windfall tax and a headline rate of 75%. The extension of the tax to 2029 will leave Aberdeen with the slowest growing economy of any city in the UK, according to EY.
“On top of that, we’ve seen the introduction of a new income tax system by the Scottish Government which has opened a significant tax gap between Scotland and England, placing businesses here at a disadvantage. Some companies are having to add a Scottish weighting on to salaries to compensate individuals for the income tax consequences of working in Scotland.
“Elsewhere, there has been a small uplift in the number of companies looking to invest in new machinery and equipment, which can be attributed to the expansion of full expensing, which has given the UK one the world’s best capital allowances regimes.
“However, if the chancellor was hoping that the Budget would strengthen growth across our economy, there is little to suggest that has been achieved.”
Findlay Anderson, Partner at Gilson Gray LLP, said: “Cash flow is a fundamental barometer of the short-term health of a business. And whilst more businesses are reporting increases in recent cash flows since the last quarter (25% to 30%), we have seen a significant rise in the number of businesses reporting cash flow declines in the last quarter – from 18% to 27%.
“These metrics confirm some of what we are seeing anecdotally in the market. There are more reports of businesses across multiple sectors making moves to manage cash flow with more utilising overdrafts or seeing credit terms under pressure.
“It is clear that the North-east economy remains resilient with less inflationary concerns than previously. However, government policies have not helped and it remains to be seen how these will affect the economy as we prepare for a critical period in both business and politics.”
Click here to read the full report.