By: Jonathan Eida, researcher
When the prime minister stood at the despatch box to face Rishi Sunak at Prime Minister’s Questions last week, Westminster was awash with speculation and chatter around the tax rises that could be included in this Labour government’s first budget.
The leader of the opposition cut to the chase, asking about the possibility of an increase in the employer national insurance contribution. Keir Starmer refused to rule out an increase.
Since taking office, ministers have spoken at length of a £22 billion black hole in the public finances. This coming on top of the £2.5 trillion in public sector net debt (excluding Bank of England) as of August. The national debt is a serious issue and one that requires a significant solution.
But, as the Lord’s Economic Affairs Committee said in a recent report: “we face a choice: taxes will need to rise or the state will need to do less.
The Lord’s Economic Affairs Committee have, therefore, suggested that governments are kept to a target which ensures that borrowing does not exceed “3 percent of GDP by the fifth year of the rolling forecast period” and “a target to ensure that expenditure on welfare is contained within a predetermined cap”. These would be simple measures to start closing the public finances gap in a sustainable manner.
The Labour Party seems to have opted for the other approach. Rather than looking to get a grip on spending, they are seeking to raise revenue by squeezing the taxpayers even more. This is despite the tax burden being set to rise to an 80 year high in 2028-29 and growth dragging itself across the floor following a recession at the end of 2023. August’s GDP figures barely moved the needle following two months of no growth whatsoever.
Prior to the election, Sir Keir Starmer promised to rebuild Britain with economic growth. The Labour Party manifesto stated “growth is the only route to improving the prosperity of our country and the living standards of working people.”
A rise in employer national insurance flies in the face of this promise. It is a cynical attempt to avoid the political blow back on raising personal taxation, but nonetheless, it is the working man who will pay.
Although the treasury estimates that a one per cent increase in employer contributions would raise £8.45 billion in the financial 2025-26, they admit that this does not include the “substantial additional negative exchequer effects from earnings and business profits”. In other words, this move will be financially damaging and will negatively impact receipts elsewhere.
Increasing the employer national insurance contribution is a jobs tax. Any tax receipt increase will be paid for in jobs. Currently, the employer national insurance contribution stands at 13.8 per cent of an employee's salary. This is far from an insignificant consideration for businesses and hiring managers.
There comes a tipping point when the benefit of employing a worker is outweighed by the cost of employing them. An increase in employer’s national insurance contribution swings the pendulum towards jobs being unsustainable, inevitably leading to job losses or lower wages.
Businesses are already being squeezed following the recent corporation tax rise. In the March 2021 budget, the government announced a rise in corporation tax from 19 to 25 per cent for firms with profits over £250,000. Rising costs means more risk and fewer jobs.
Fewer jobs also means less taxable income and more government expenditure. More welfare, less government receipts. The lack of dynamic modelling means these effects are not accounted for in the treasury’s estimates.
The alternative is that businesses choose to cut their investments. They will stop growing, cutting down on expenses in order to ensure they remain in the black. To deliver growth, we need a business friendly environment. Bumping up business costs is a move in direct opposition. It creates more risk and instability, providing lower returns. All this adds up to lower government tax receipts.
A tax on jobs is the last thing this country needs. It will create a worse environment for businesses and hard-working taxpayers while negatively impacting the amount the government raises. To balance the budget, the priority must be to cut public spending. The alternative is more suffering and misery for workers and our economy.