Rachel Reeves wants growth, and it's thought she's going to seriously increase employers' national insurance contributions, which is most likely to stop that happening. Why is she adopting such an absurd approach to the economy?
The audio version is here:
This is the transcript:
A national insurance increase charged on employers could kill growth in the UK economy. Of course, that's serious because Rachel Reeves is, we understand, planning an increase in employers' national insurance contributions in the budget that is going to be happening very soon, and that budget is supposedly all about delivering the growth that she thinks is the foundation for the economic changes that Labour is going to bring to the UK.
So, how can she do one thing - increase the national insurance, which is paid by employers - and at the same time deliver growth when the two work in direct conflict with each other? The answer is, I don't know, of course, because if my objective was growth, I would not be increasing a tax on employment.
Now, let me explain how employers' national insurance works. Above a certain limit, an employer pays 13.8 per cent of the amount that they pay to their employee in employers' national insurance at present. That is significantly more than the employee pays, by the way, because they're only paying 8 per cent now as a result of the cuts introduced by Jeremy Hunt, the last only in March 2024.
So, 13.8 per cent of the cost of your salary, if you have one, is, broadly speaking, going to the government in employers' national insurance, and it is rumoured that Rachel Reeves is going to increase that by 2%, making that figure 15.8%, and that is a pretty hefty increase.
More than that, it is also suggested that she is looking at charging employers' national insurance on the pension contributions that employers make on behalf of their employees, something that has never been done because it has been assumed that if an employer makes a pension contribution on behalf of their employee, the employee will make a smaller demand for a pension in old age, and as a consequence, the demand for benefits in the overall social security system will fall, and national insurance was once designed to contribute to social security and the NHS.
Well, that's how it works.
Now let's talk about the reality, because this might be called employers' national insurance, but the truth is that the payment is actually suffered by the employee. Now I know it doesn't look like that, because as Rachel Reeves is relying upon, there will be no change in the employee's apparent net pay going into their pocket after the budget as a consequence of increasing this employers' national insurance contribution. So how can I say that it is the employee who will pay this extra two percent?
The answer is quite straightforward. The evidence is overwhelming from economic studies, and in this case, I believe them, that if the employers' national insurance contribution goes up, those employers simply resist making pay increases to the employees that they have on their books, and as a consequence, eventually the employee suffers a decline in their real wages sufficient to cover the cost of the increase in the employers' national insurance contribution. So, in other words, it is eventually the employee who pays.
And that's what Rachel Reeves is getting wrong here. Superficially, this looks like a great move by her because it means that she can keep her manifesto commitment that she will not increase national insurance, and she didn't say she wouldn't increase employers' national insurance, she only said she wouldn't increase workers' taxes, and she's interpreting that as only referring to employees' national insurance. But, if she does increase employers' national insurance by 2%, the net effect will be that there will be downward pressure on wages, which will overall reduce them by, you've guessed it, approximately 2%.
Is that of consequence to her overall economic thinking? It's dire for it, because she says that growth is absolutely core to what she wishes to deliver. Now, assuming that she's a wise person, and she believes that growth should be perceived to exist in the pockets of those people who are going to vote for her, which is most people in the country if she's going to get back into office in 2029, of which there is no guarantee, then she will want to make sure that they feel better off as a result of that growth.
But this move will mean that they won't. Not only will they feel worse off, because there will be downward pressure on wage settlements, and that's going to be uncomfortable for her, and will lead to industrial strife, but people will actually end up feeling that they have less in their pockets. That will make them feel worse off in real terms, and it has a further consequence.
If they don't feel better off in real terms, they will, of course, not spend as much. And if they don't spend as much, the economy won't grow as much. It is something that follows like night does day. And as a consequence, what Rachel Reeves is doing is economically absurd. Crazy. A mistake. You can call it whatever you like, but it is just poor economic thinking for political expediency.
And that, in a nutshell, summarises just about everything you need to know about Rachel Reeves.
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Richard,
I work in Benefits and my suggestion with NI might be
1. To equalise NI between part and full time workers so you dont end up with the situation where only part time jobs are created by many employers
2. There as some business’s eg Hospitality, Retail etc that employ a high percentage of low paid workers. Amongst other things they need means tested benefits, get sicker etc imposing costs on society so I would suggest some sort of ‘low pay’ surcharge for business’s with a high percentage of low paid workers
Thanks
I totally agree that raising NI by 2% would be a mistake, poor economic thinking for political expediency.
However, there does seem to be potential in the NI system for changes that would “raise revenue”, decrease inequality and, potentially, increase growth.
You say in your Taxing wealth report that the anomaly of 2% NI above the higher earning threshold should be removed, “raising” perhaps £12.5 billion per year. This is not going to happen because of Labour’s pledge not to increase NI, which they are (falsely) interpreting as not increasing employee NI.
Well, if Reeves is going to increase employers NI, why not increase it only above the higher earnings limit, from 2% to, say, 13.8%? This would more or less achieve what you suggest in you report.
That would, of course, still extract money from the economy and therefore reduce growth. To avoid that why not go further and increase NI beyond 13.8% for still higher earnings? This would also “raise revenue” but would not necessarily reduce demand because the wealthy, who would pay it, have a lower propensity to spend. Then you could reduce taxes elsewhere (direct income tax?), slightly, to offset the reduction in increasing NI. In this way you could, perhaps, both “raise” more revenue without reducing growth. The trick is to “raise revenue” from those who are not going to spend it anyway, from those who will save it, who are the wealthy.
This is, of course, not going to happen. But it could. And it highlights the lack of competence and imagination of Reeves and the fact that she is making bad choices that won’t achieve her objectives and will damage the economy and hurt people.
I think your analysis is correct but your conclusion is wrong. I suspect that Reeves understands exactly how this raise will end up being paid for, and this will have been agreed with large the corporations. Any business large or small will know how to claim this back off the employee, via lower pay increases. I doubt any journalist (who probably also understand what is going to happen) will point this out, but will simply carry on pretending that taxes on “working people” haven’t gone up.
This will enable the Govt. to trumpet their “economic competence” as they reduce the “debt” whilst continuing to syphon off Gov’t money to their friends.
It is is cynical and deliberate and should be called out as such.
I do not know whether to laugh or cry.
Local authority’s are employers too and look at their budgets!!
Reeves twists and turns remind me of the evasive action of a quarry in a dogfight.
Yet why is it her that is running? The power she presides over and ignores!!!!
I am beginning to get rather angry about this, even though what seems to be creeping in is desperation.
We are dealing with a closed shop when it comes to the Labour front bench. They have locked themselves in with some of the most evil people and ideas I can think of leaving reason outside the door.
This is capital’s big moment in my view – they want it all and they are going to take it.
You’re right
Minister, Brexit also slows growth. It has cost us…
Shut up, Bernard !
I wonder if that conversation takes place in Whitehall?
Why not remove NI exemption for Limited Liability Partnerships, she’d raise substantial sums.
Most (but not all) employers have to pay the current uncapped NI rate of 13.8% on employee’s salaries. LLPs with vast revenues running into the billions only pay NI on salaried members/partners or staff, not on the often much higher incomes of their profit sharing members/partners classed as self employed.
This loophole costs between £100,000 – £150,000 on every £1m of LLP profit shared; which is a huge loss in potential revenue for the Treasury.
That would be akin to saying all the self employed should pay this NI when by definition they are not employed
Interesting article in Private Eye this week on this subject. The main losers of closing this loophole would appear to be the partners and members at the big 4 and hedge fund managers, who I think should be paying at a similar rate to other organisations.
Richard points out that this would affect all the self employed, but surely a payment threshold similar to the vat threshold would avoid this?
Something like that might work
So too might a test akin to IR35
If the standard neoclassical analysis of the incidence of employer NICs is correct then I would imagine that the negative employment impact of an increase would be minimal, because it doesn’t affect employer costs… it just reduces wages. There might be some labour supply impact because hourly wages are falling slightly (so people are less likely to move into work at the margin) but I’m not sure I believe that either – average growth over the last 25 years or so has mostly been feeble in real terms, but employment growth has been reasonably strong as a percentage of the working age population.
*However*, there is some recent evidence that the standard economic model is wrong, and the incidence of employer NICs is *not* on employees, but employers… and it’s from the unlikely source of the IFS! See https://ifs.org.uk/journals/35-years-reforms-panel-analysis-incidence-and-employee-and-employer-responses-social
Stuart Adam and colleagues (using the New Earnings Survey panel dataset) found that there was a clear significant relationship between increases in employee NICs and net wages (not surprising as employee NICs are paid out of gross wages), but *no* statistically significant relationship between employer NICs levels and wages – at least in the short-to-medium term (up to 18 months after NICs changes). This suggests that employer NICs are being paid by employers rather than employees. If true, this suggests that employer NICs increases might have a significant impact on employment because they increase labour costs (i.e. they are an additional cost on top of wages, rather than just being passed on to employees). I think more empirical work is needed on the employment impact of employer NICs.
I think that all the IFS found was the temporality of the process of change: I suspect that understanding that the world does not react instantly to price signals is a real shock to them.
There will be another video on this on Saturday. The impact of this, if it happens, is going to be big. It may be worth discussing again then.
This Government (so far) is ruthless and cruel and no better than the one it displaced.
I thought Hunt’s sleight of hand in cutting the NI rates employee’s pay whilst increasing the NI employers pay was deceptive. Reeves, quadrupling-down on that is worse.
Once again, Labour is out-Torying the Tories.
Would this not be a case to remove the hidden stealth tax of “Employer” contributions to National Insurance? It is just another part of the broad salary, that is to say, of the money that is paid “FOR” the employer, even if not “TO” the employer directly. If it is incumbent on the employer to pay it to HMRC, what is the practical difference with PAYE retentions or the “Employee” NI contributions? Just put it all on the Payslip and let people know how much of their effort pays for it.
It can be on payslips now