Business betrayal and falling living standards

Of all the measures announced by Rcahel Reeves in the budget, the decision to increase employers' national insurance contributions is the one that is going to cause her the most problems. This is evidenced again by an article in the Independent in which leaders of Britain’s biggest business organisations have accused the Labour government of “betrayal”.

The paper says that Barclays Bank has warned that the increase will hit workers’ living standards, with economists at the bank claiming that the policy will cause real incomes to take a hit, as companies pass on the cost of the levy through lower pay rises and higher prices. This, they say, will leave people feeling poorer as prices rise faster than wages:

Despite a manifesto pledge not to increase taxes for working people – including NICs, income tax and VAT – the chancellor increased employers’ NICs from 13.8 per cent to 15 per cent at the Budget. She also reduced the threshold at which employers start paying the tax, slashing it from £9,100 per year to £5,000.

In a note to clients seen by The Daily Telegraph, economists at the bank said: “We expect the additional costs implied by changes to employer NICs to lead to lower real incomes, through a combination of higher inflation and lower wages.”

Meanwhile, the prime minister has been urged to take “decisive action” to restore business confidence following the decision to increase employer NICs – something business groups have described as a “betrayal”.

The chancellor argued that the policy, which is expected to raise more than £25bn for the Treasury, does not breach Labour’s manifesto commitment because it does not show up on employees’ payslips.

However, businesses have urged the government to change course, warning that they will be forced to “tighten their belts” as a result of the policy and claiming that some are facing a sevenfold rise in their bills as a result.

John Longworth, chair of the Independent Business Network, described the Budget as “anti-growth”, while Dr Roger Barker, director of policy at the Institute of Directors, said the increase in employer NICs takes “no account of whether a business is profitable or not”.

It comes after hospitality bosses wrote a letter to the chancellor warning that the changes are “regressive in their impact on lower earners”.

Mr Longworth told The Independent that Sir Keir Starmer has “betrayed himself and the nation with his first Budget”.

“He and the chancellor persistently stated (correctly) that wealth creation and growth are the No 1 priorities on which all else depends. The Budget and other policies are anti-growth and will therefore fail,” he said.

He warned that the NICs increase will “either cause job losses, wage depression, or lead to underinvestment as a consequence of profit loss”.

Alex Veitch, director of policy at the British Chambers of Commerce, said the combined impact of the NIC increase and the rise in the national living wage means that some firms are looking at a sevenfold increase in their bills.

There is no doubt that Reeves needed to raise taxes to invest in public services, but the choice of employers' national insurance contributions could prove to be disastrous electorally and economically. 

An alternative put forward by Dale Vince, the green energy tycoon who has previously donated £5m to Labour, is a 2 per cent wealth tax. He says that this tax would “barely touch the edges for the very wealthy” and would raise “£24bn for our NHS, for child poverty, to save our planet”.

Over to you Labour.