British advertisers face short-term pain after Britain’s $50 billion tax raise

Last week, Britain’s newly elected Labour government released its economic and tax plans for the coming years, putting an end to months of speculation and providing more clarity for consumers and advertisers alike.

Known as the “budget,” the plans included the biggest tax increases in three decades, amounting to £40 billion ($51.8 billion) a year. Notably, the plan will increase employer National Insurance contributions, a payroll tax paid by businesses, at the start of the fiscal year in April.

A recent Deloitte survey found that consumer confidence in the U.K. in the third quarter of this year was at the highest in five years. Whether that continues after the budget and into the crucial holiday shopping season remains to be seen.

Looming higher taxes could affect consumer and advertiser sentiment in the short term. Some business leaders say a hit to their bottom lines could hamper their ability to invest in pay raises and hiring, not to mention advertising and innovation.

On the other hand, Labour leaders say higher tax receipts could increase the economy’s productivity over the long term by improving health services and education, for example. The budget also increases the national minimum wage, “which will create extra spending power for a key audience target for many advertisers,” says an executive at a large media agency in the U.K.

“We just have to hope that this short-term pain will, as the chancellor suggested, ultimately unlock vital long-term growth for the U.K. economy,” wrote Paul Bainsfair, director general at the Institute of Practitioners in Advertising, an industry trade body.

What this means

For British advertisers, the budget brought clarity, gloominess and some optimism, all in one package.

“Today’s budget provides welcome clarity about the new government’s plans, lifting some of the uncertainty that stalled marketing spend in Q3,” says Christie Dennehy-Neil, head of policy and regulatory affairs at Interactive Advertising Bureau (IAB) U.K., an industry trade body.

However, the payroll tax rises may end up impacting consumers’ spending power, with the Institute for Fiscal Studies, an economics think-tank, warning they could lead to lower pay raises for employees.

Even the U.K.’s finance minister, Chancellor of the Exchequer Rachel Reeves, admitted that her plans would likely affect pay growth across the country. “But overall, the Office of Budget Responsibility [OBR] forecast that household incomes will increase during this Parliament,” she told the BBC.

Looking ahead

The mixed bag of economic signals looming over the horizon may not deter advertisers from growing ad spend.

IAB U.K.’s Digital Adspend update for H1 2024 shows that the total digital ad market grew 16% in the first half of the year, even as the U.K.’s GDP grew by only 0.5%. “[This] indicates that marketers have continued to prioritize advertising despite the uncertain economy,” says Dennehy-Neil. Connected TV in particular helped drive video ad spend’s 26% year-on-year growth.

“While the tax rises announced today will increase pressure on business, the OBR is now predicting stronger economic growth in 2024 and 2025, and we expect advertisers’ confidence to remain buoyant,” adds Dennehy-Neil.