British business output shrank for the first time in more than a year and tax increases in the new government’s first budget hit hiring and investment plans, a survey showed, a fresh setback for Prime Minister Keir Starmer’s push for economic growth.

The preliminary S&P Global Flash Composite Purchasing Managers’ Index, published on Friday, fell to 49.9 in November – below the 50.0 no-change level for the first time in 13 months – from 51.8 in October.

“The first survey on the health of the economy after the budget makes for gloomy reading,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.

Employers cut staffing levels for a second month in a row – with manufacturers reducing headcount at the fastest pace since February – as they turned more pessimistic about the outlook.

The survey’s measure of overall new business was the weakest since last November.

A weaker outlook for the global economy weighed on companies with the automotive sector in a slump. But the first moves of Britain’s Labour government were also a cause for concern.

“Companies are giving a clear ‘thumbs down’ to the policies announced in the budget, especially the planned increase in employers’ National Insurance Contributions,” Williamson said.

Finance minister Rachel Reeves raised the rate of social security contributions paid by employers and lowered the threshold at which companies must pay them as she sought to raise more money to fund public services.

Many employers have said the budget changes fly in the face of the pledge by Reeves and Starmer to turn Britain into the fastest-growing Group of Seven economy.

Momentum was already weak with gross domestic product edging up by only 0.1 per cent in the July-to-September period, according to official data published last week.

Figures on Thursday showed government borrowing shot past forecasts in October, underscoring how reliant Reeves is likely to be on an improvement in economic growth to generate the tax revenues needed to fund more spending on public services.

Friday’s survey found firms were not replacing departing staff as they braced for April’s rise in payroll costs.

Williamson said the survey suggested the economy was contracting at a quarterly 0.1 per cent pace but the hit to confidence hinted at worse to come, including further job losses.

Selling prices rose at the slowest rate since the coronavirus pandemic but high rates of growth in input prices and costs related to wages were hurting the service sector.

That could worry some interest rate-setters at the Bank of England which is watching prices in the service sector closely.

Inflation also jumped by more than expected last month, showing why the central bank is moving cautiously on interest rate cuts.

The business activity index for the dominant services sector fell to a 13-month low of 50.0 from 52.0 in October. The manufacturing index slid to 48.6, its lowest in nine months, from 49.9 in October.