Scottish firms warn ‘persistently high cost of doing business’ including new taxes risks long-term harm to economy

An increasing number of companies are also reporting challenges in recruiting staff, according to the latest economic indicator from the Scottish Chambers of Commerce (SCC). The findings highlight a raft of challenges facing firms north of the Border as consumers continue to rein in discretionary spending with business leaders warning of a potential long-term hit to the economy.

The opening three months of the year saw a “significant” downturn in cashflow and profits, with sizeable contractions recorded across four of the five sectors monitored by the report, which ranks as Scotland’s longest-running business survey, operating since 1990. Some 400 firms responded to the first-quarter snapshot and the vast majority were small and medium-sized enterprises (SMEs) - classed as businesses with fewer than 250 employees - the backbone of Scotland’s private sector economy.

Stephen Leckie, president of the SCC, described the operating environment, both nationally and globally, as “exceptionally challenging” and also warned over the impact of income tax divergence between Scotland and the rest of UK - an issue raised earlier this week by fellow business body the Institute of Directors Scotland.

Leckie said: “The latest insights from Scottish business underscore the extreme cost pressures facing companies in all sectors. The persistently high cost of doing business is hammering cashflow and profitability which will hit the economy in the long-term.

“Geopolitics has moved up the agenda in boardrooms underlining the critical role governments will continue to play to ensure smooth trading conditions. Red Sea disruption, unresolved global conflicts and emerging concerns on data sovereignty are live issues businesses and communities require clarity on.”

He added: “Closer to home, businesses continue to express major dissatisfaction with tax policy direction from Scottish and UK governments. Businesses are concerned about the impact of income tax divergence between Scotland and the rest of the UK in attracting and retaining talent. Scotland’s additional regulations such as the tourism tax is also a cause for concern which is increasing the cost of doing business.

“The message from businesses is clear: we need governments north and south of the Border to reduce the tax burden.”

According to the survey, more businesses are seeing challenges in recruiting staff, increasing to 47 per cent of firms for the first quarter compared to 40 per cent in the previous three months. However, recruitment intentions remain stable for the current quarter.

More firms indicated that they will hike prices compared to the previous quarter, rising by ten percentage points to 50 per cent of all businesses. The leading cost pressures remain labour costs (76 per cent of firms citing the issue), energy costs (60 per cent) and raw material prices (44 per cent), with more companies raising concerns specifically on labour and energy costs. More than half of firms have reported investment freezes and do not expect this to change next quarter due to the economic uncertainty.

Leckie said: “More businesses are struggling to find and secure the skills and talent they need with recruitment difficulties significantly increasing over the quarter. The planned increase in the national minimum wage, whilst welcome for workers, will heap extra costs on the most vulnerable sectors such as hospitality and leisure explaining why labour costs is the number one cost pressure this quarter.

“Changes to the UK immigration system also threaten to harm Scotland’s attractiveness, with a planned 50 per cent rise in the minimum salary threshold for a skilled worker visa from April. This policy alone will make it impossible for many Scottish businesses to hire international staff as the salary threshold is far higher than Scotland’s average wage.”

He added: “The challenges highlighted in the survey are a perfect storm impacting investment decisions: recruitment challenges, tax burdens, weak cashflow and declining profits.”

The SCC’s latest indicator was released as a separate study indicated that Scotland’s economy was “recovering hesitantly”, following the contractions in growth in the final part of 2023. In its quarterly economic commentary, the Fraser of Allander Institute is forecasting growth of 0.6 per cent in 2024, 1.1 per cent in 2025 and 1.2 per cent in 2026. These projections are unchanged from its previous assessment.

Consumer sentiment has risen 4.8 points over the last quarter and 23 points over the year. However, most indicators remain in negative territory - meaning more people are negative than positive about their circumstances - reflecting the “challenging economic and financial pressures facing households”, the institute added.

Mairi Spowage, director of the Fraser of Allander Institute at the University of Strathclyde, said: “The mixed bag of economic news we are seeing for both Scotland and the UK at the moment could give reasons for either pessimism or optimism. On the one hand, the economy returning to growth in January and inflation falling faster than expected support our view that we will return to growth in 2024 overall. On the other hand, this growth is fragile and may be blown off course by events, particularly given geopolitical uncertainty this year.”

Douglas Farish, head of tax for Scotland at Deloitte, sponsor of the economic commentary, added: “The cost-of-living crisis continues to take a toll on household finances, and our latest report found that 60 per cent of the Scottish public believe the crisis will get worse still, albeit dropping from 75 per cent last year.”

Interest rates, Brexit, recruitment - the triple headache keeping Scottish business owners awake at night