UK economy stumbles in run-up to next week's budget

By David Milliken, Andy Bruce and William Schomberg

LONDON (Reuters) -Measures of Britain's businesses, consumers and public finances are all showing signs of deterioration in the run-up to next week's budget when finance minister Rachel Reeves is expected to raise taxes again.

Data released on Friday suggested that worries about the budget are weighing on the world's sixth-biggest economy and underscored the scale of the challenge for Reeves as she tries to cut borrowing without further slowing already weak growth.

The S&P Global Purchasing Managers' Index preliminary survey for November showed companies were pausing their plans while they waited to see if their taxes will go up for a second year running.

Reeves is due to announce her budget on Wednesday next week. She is expected to raise tens of billions of pounds in taxes to avoid a selloff in the bond market, but possibly at the price of further upsetting voters who are already unhappy with Prime Minister Keir Starmer and his government.

REAL CHANCE OF A DOWNTURN

The PMI survey showed the services and manufacturing sectors barely grew in November and fared worse than all economists' forecasts in a Reuters poll, suggesting growth of just 0.1% in the economy in the last three months of 2025.

"There's a real chance this pause may turn into a downturn ... largely linked to speculation that further demand-dampening measures will be introduced in the Budget," S&P Chief Business Economist Chris Williamson said.

Official data from the Office for National Statistics showed consumers shopped less in October, the first month-on-month drop in retail sales volumes since May.

The ONS also said government borrowing in the April-to-October period was the biggest in records going back more than 30 years, apart from during the height of the coronavirus pandemic.

Reeves raised taxes by the most since 1993 in her first annual budget last year, with businesses bearing the brunt through higher payroll taxes.

BUDGET MAY NEED TO RAISE 20-30 BILLION POUNDS

This year, Reeves is expected to need to raise a further 20 billion-30 billion pounds ($26 billion-$39 billion) due to an expected growth downgrade from the government's budget watchdog, higher borrowing costs and an inability to pass planned welfare cuts through parliament.

For much of the PMI survey period, Reeves indicated she was likely to break Labour's election promises and raise the main rate of income tax for the first time since the 1970s. Now she appears to favour a string of smaller measures.

The survey showed private-sector employment fell at the fastest pace in four months and prices charged by businesses rose by the least since December 2020, likely boosting the chances the Bank of England will cut interest rates next month.

Another data release on Friday showed consumers turned less confident in November.

The GfK consumer confidence barometer, Britain's longest-running survey of household sentiment, dropped to -19 from -17.

Neil Bellamy, consumer insights director at GfK, described the figures as "a bleak set of results as we head towards next week's budget" although the level remained within its range of the past six months.

(Writing by William Schomberg; Editing by Conor Humphries)