UK SMEs brace for a new era of fiscal tightening as global trade realigns

UK SMEs face a difficult and volatile year ahead. Companies must navigate a weakening macroeconomic environment, fragile fiscal policy, and heightened uncertainty over global trade. Although US President Donald Trump announced a 90-day pause on most tariffs – notably excluding China – global markets remain volatile, and concerns over growth, inflation, and disrupted supply chains persist. Rising UK gilt yields have added fresh pressure on public finances and borrowing costs. Collectively, these forces are dampening customer demand, squeezing margins, limiting access to finance, and delaying decisions on investment and hiring.

Chancellor Rachel Reeves’ Spring Statement responded to a £14 billion deterioration in the fiscal outlook, driven by rising borrowing costs and weaker growth. Reeves restored the identical £9.9 billion headroom buffer set out in the October Budget through £8.4 billion in welfare and spending cuts. However, the headroom remains fragile. A small change in gilt yields, a modest downgrade to the UK’s productivity, or a further softening growth forecast risk derailing Reeves’ plans again. Since the Office for Budget Responsibility (OBR) finalised its forecast in mid-February, gilt market movements have already wiped out nearly half of the reinstated buffer, according to Bloomberg Economics. The OBR assesses only a 50-54% probability that Reeves will meet her headline fiscal targets. At the same time, the Institute for Fiscal Studies (IFS) said the arithmetic underpinning the “tiny” headroom was “precarious”. A fresh bond market sell-off overnight on 9 April, triggered by Trump’s tariff escalation with China, pushed UK 30-year gilt yields to their highest level since 1998, adding further pressure to the Chancellor’s already narrow fiscal room and raising borrowing costs.

This exposes SMEs to both macroeconomic and policy risks. The sensitivity of the fiscal framework that underpins decisions on government spending, welfare and taxation raises the prospect of further fiscal tightening in the coming autumn Budget or even a reversal of Reeves’ pledge not to raise taxes. The risk is heightened further with the government’s growing defence spending commitments. For SMEs, this uncertain trajectory increases the likelihood of delayed investment, hiring freezes, and cautious corporate planning in the months ahead. 

Trading Conditions

Trading conditions will become more difficult for many SMEs. The OBR has halved its GDP growth forecast to 1.0% in 2025, citing weaker consumer demand and sluggish investment.

Real household disposable incomes are expected to stagnate over the next three years, driven by frozen tax thresholds, welfare tightening, and rising employer National Insurance Contributions (NICs), which come into effect from 6 April. SMEs may pass on NIC increases through lower wages and higher prices. The employer NIC increase will erode profit margins, hurting most in labour-intensive sectors, including construction and care homes, as well as consumer-facing industries like retail, leisure and hospitality. It also risks undermining workforce retention, particularly in industries where tight labour markets are putting pressure on wages while customer price sensitivity is growing.

High borrowing costs further complicate the outlook. The Bank of England (BoE) held the Base Rate at 4.5% in March and expects inflation to rise back to 3.75% later this year, reflecting persistent domestic price pressures and growing global trade tensions. This will delay relief from high borrowing costs for much of 2025.

Retail sales volumes rose for a second consecutive month in February, but high household saving rates and fragile consumer confidence cast some doubt over whether this is a durable rebound in consumer spending. More likely, revenue pressures for SMEs in consumer-facing sectors will persist. According to the OBR, business investment is expected to grow at just 1.3% annually through 2029, with levels only marginally above their pre-pandemic baseline. This signals softening growth plans in pursuit of operational resilience.

Wage growth remains high at 5.9%, excluding bonuses, according to the ONS. The BoE has reported signs of hiring freezes and potential job cuts if growth fails to improve. IFS warns that reduced welfare could expand the labour pool, but absenteeism and increased hardship among low-income households may lower productivity. The Employment Rights Bill is flagged by both the IoD and CBI as raising hiring costs and reducing flexibility. Employers face a delicate balance between managing labour costs and retaining staff under uncertain demand conditions.

Tariffs 

Compounding the domestic challenges are rising global risks. US President Donald Trump’s sweeping tariff regime includes product-specific levies on autos, semiconductors, steel, pharmaceuticals, and timber. However, Trump announced a 90-day pause on reciprocal tariffs for countries willing to negotiate, while sharply increasing tariffs on Chinese goods to 145%, deepening tensions with the world’s second-largest economy. The exposure for UK SMEs is focused on advanced manufacturing, life sciences, and industrial supply chains, predominantly from indirect vulnerabilities through the EU, the UK’s largest export market.

The sharp escalation against China also risks prolonged disruption to global supply chains, indirectly pressuring UK SME exporters over time.

While the UK’s overall exposure to US tariffs remains lower than other advanced economies, pre-existing measures – like the 25% tariffs on exported cars, as well as steel and aluminium, unaffected by Trump’s 90-day pause on reciprocal tariffs – continue to pose sector-specific risks. SMEs in auto supply chains and metal production could still face significant margin pressure and trade disruptions from these ongoing tariffs, either directly or through second-order effects if EU demand weakens. For example, the 25% auto tariff directly affects UK motor vehicle and parts exporters, while indirectly threatening SMEs that supply components to EU-based firms exporting to the US. While pharmaceuticals have so far been spared, potential future tariffs – unaffected by the pause – could eventually disrupt UK life sciences SMEs within EU supply chains. In addition, UK logistics firms and non-EU exporters may still be affected as multinationals reconfigure supply chains to reduce exposure to ongoing tariffs, with the 90-day pause offering only partial respite. Despite a market rebound from the pause, early signs of a global trade slowdown persist, posing broader risks to SMEs reliant on international supply chains. Elsewhere, the UK’s Digital Services Tax (DST) has reportedly been cited by the US as a possible target for retaliation. While not a tariff, it compounds uncertainty for UK-based tech SMEs and e-commerce platforms that could be drawn into a broader trade dispute unless a bilateral agreement is reached.

The OBR has warned that a full-blown trade war could wipe out Reeves’ entire fiscal buffer and subtract up to 1% from GDP. This increases uncertainty for SMEs in the manufacturing, automotive, and goods distribution sectors regarding export access, input costs, and delivery timelines. Consequently, these businesses should prepare for higher shipping costs, regulatory friction at borders, and increased exchange rate volatility.

Some UK industries may emerge as relative winners. Construction will benefit from planning reforms and mandatory housing targets, with the OBR forecasting housing delivery to rise above 305,000 homes annually by 2029. A £625 million skills package aims to train 60,000 construction workers. Defence and advanced manufacturing could also see gains. A £2.2 billion uplift in defence spending will support supply chains in Barrow-in-Furness, Derby, Newport and Portsmouth. SMEs in logistics, cyber, and R&D could benefit if access to land, skills and planning keeps pace. Infrastructure-related SMEs may benefit from the £13 billion capital spending uplift over the Parliament, though execution risk and delivery bottlenecks remain high. 

How SMEs Can Prepare

UK SMEs face a year of tightening conditions and greater uncertainty. To navigate the risks ahead, businesses should focus on strengthening financial and operational resilience. This includes stress-testing cash flows, adapting to new employer tax obligations, and preparing for potential demand shocks.

BTG Advisory is well-positioned to support SMEs with refinancing and balance sheet optimisation, independent business reviews, scenario planning, forecasting, and supply chain resilience assessments. We provide tailored restructuring, refinancing, and strategic advisory solutions to help businesses stay agile, unlock value, and adapt confidently to evolving macroeconomic pressures.