2024 was a turbulent year for UK businesses. Many feel we started the year at rock bottom after the significant tax and regulatory changes announced in the Autumn Budget. To recap, that’s annual tax increases of nearly £40 billion, an increase in borrowing of £127 billion over five years, and billions in additional revenue and capital expenditure, writes Ross Boyd from RBCA.

2025 presents a mixed picture. Can Government drive economic growth through investment, manage inflationary pressures, and balance public debt to create the stable landscape they alluded to in October? And what opportunities and challenges are on the table for Northern Ireland businesses?

Business vs Worker

2025 is the year the UK will deal with the “business vs worker” concept. As millions of business owners work hard to keep their businesses going, the outlook will vary. With higher corporation rates in the UK compared to Ireland, increasing employer National Insurance contributions, increasing capital gains tax and increasing inheritance tax, there is little for businesses to really get excited about. Will more owners exit in 2025? Hard to call when even workers may not feel better off with ongoing fiscal drag, ongoing inflation and above expected interest rates.

Growth Projections

Growth is being talked about but nobody in the business community feels it. Growth needs solid plans, not just talk. A few landmark projects in England such as a 3^rd runway at Heathrow in 2040, and the creation of Europe’s Silicon Valley, are not going to help small businesses recruit or pay for staff in April 2025. There is likely to be some growth for suppliers and workers in the public sector, but generally, business owners would be wise to study their mix of customers carefully.

The term ‘stagflation’ could become increasingly relevant as inflation has not fully gone away, and we have little growth. Yes, rate cuts will be gradual, likely starting from February, and as a result inflation is due to settle at about 2.7 per cent this year. However, we can’t forget that the UK has had the highest rate of inflation in the G7 since June and 2.7 per cent would keep us in that spot. So, not a catastrophic situation, but not a good one, and certainly tricky for NI entrepreneurs to navigate. This is especially so for service-based businesses, as increased pressure on household finances will make it difficult to set prices. It will be interesting to see who the winners will be in this changed landscape.

Real productivity improvement

The UK has appeared limited in productivity improvement since the iPhone appeared in 2007. Technology seems to have changed our lives – we’re dependent on it, yet we are not more productive for it. Can AI really deliver increased productivity? UK Government thinks so but how easy is it to transform the public sector with tech? Projects like Making Tax Digital indicate that gains are difficult. For me, the opportunity lies in automation. With higher wages, employment taxes and a tight local labour market, it is sensible to reduce staff dependency. If businesses lead the market in this area, they will initially need investment, but then see margins develop and later sales growth as others become uncompetitive.

Public Debt

We can’t possibly discuss 2025 without highlighting our stretched public finances. This is a serious concern as it limits Government’s capacity to address potential economic shocks in the future. Recession, Brexit, Covid, Ukraine and Trump are just some examples of the real volatility of recent years. When the climate is uncertain lower debt and conservative plans are generally needed.

This isn’t me being unnecessarily cautious – it is a fact that the UK’s debt is now of the worst of the advanced economies. What’s more? Reeves is now scrambling to find ways to raise revenue to help fill a £22 billion hole. Whilst I agree that the economy has long suffered from chronic levels of underinvestment, the landscape is currently such that businesses don’t want to back themselves. Our owner-managed businesses are the backbone of Northern Ireland’s economy, yet most of these SMEs are losing confidence. Government’s current spending decisions make investment risky and business owners need to very carefully assess their options. Some may get 2025 right, but an entrepreneurial mindset will be needed.

Labour Market

The labour market will ease as firms hold off recruiting to rationalise the workforce, especially those who can reduce their number of physical locations.

As a young accountant I was taught that to budget you worked from the bottom up. You assessed what was needed to operate the business, by product or service, and you attributed the relevant costs to assess revenue requirements and margins against the market. It now seems we have decided our tax revenues, and we are going to cut our cloth accordingly despite what the spending revenue reveals. This may create cost pressures in Northern Ireland as tax revenues don’t meet expectations or interest costs increase.

All in all, there is a quiet confidence that we may leave 2025 in a better position than we entered it, but the year certainly won’t be without its casualties and there could be a few bumps on the road. Rising national insurance contributions, increased labour costs and persistent inflation will temper most optimists for some time.