I just posted this on Twitter:
Most budgets end in tears for Chancellors within days of being delivered.
The trouble is that even if Chancellors understand economics, and few do, they do not understand the real-world consequences of what they propose.
I think, based on what we know already, that the backlash on this one will be on employer's NIC increases.
A 2% increase, as expected, will hit all employers, and especially small ones, really hard.
If they realise government departments have been compensated for this cost and they are not going to be the result will be severalfold.
First, there will be anger. The press will feed on this.
Second, some will have no choice but pass on the cost - which is going to be inflationary, which is utterly bizarre for labour to do.
Third, some will go bust. Hospitality is already having a bad time.
Couple this with the increase in the minimum wage - which does make sense, but not in combination with an increase in NIC on the same employees - and unemployment, especially among young people, will go up. That is crazy.
And once more, expect businesses to give up.
Where will the crunch points be?
Nursery care will be one. An increase in employer's NIC plus an increase in the minimum wage, which most young carers are paid, will lead straight into price increases that few young families already hit by staggering rent or mortgage rises will not be able to afford.
There is going to be a lot of anger about that.
And expect the same in social care - where the same situation arises and the costs will have to be passed on to those already struggling.
Rachel Reeves might think this increase is a really useful way of getting around her manifesto commitments. The reality is that Labour will be hitting the chances of lower-paid employees hard by reducing the number of jobs available to them.
And it will be hitting some very hard-pressed families very hard.
This is not going to go well for Rachel Reeves. Unless that is, someone has told her to abandon the NIC increase - but she won't balance her books without that, and that, of course, matters much more than nursery care, social care, vulnerable businesses and the chance of employment for young people.
I hope I am wrong, but it looks like Labour has this very wrong.
POST BUDGET UPDATE at 16.50:
Having now heard the Budget and having had a chance to think about it, I believe that my forecast made above was too generous.
Rachel Reeves only increased employers national insurance by 1.2%, to 15%, but because she reduced the point at which this contribution becomes payable from £9,100 of annual equivalent salary, to £5,000 of annual equivalent salary, the marginal impact on those on low pay will become very much more significant and as a result all the consequences that I foretold will, I think, come about, and be worse even than I expected.
The backlash on this will be big.
The consequences for employment, growth and inflation are all bad.
I have to conclude that Rachel Reeves really did not know what she was doing when proposing this change.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
I wonder who advises Reeves. A billionaire can pay themselves the median salary (£35,000) every year for 28,571 years, tax free. I’d say there are people who have so much they will never spend most of it, and so what they have is either doing nothing or stopping others from getting a toehold on scraping by. If spending needs to be followed by taxation, the best place to focus tax is just before money reaches its final resting place in the hands of the wealthy who, I’ve read, have a marginal propensity to save. Anything else is strangling money before it really has a chance to be useful in society. Seems that neoliberal thinking isn’t really thinking at all. There was a post on a recent thread who said that we should stop talking about people being taxed, as it’s money that is taxed. I agree, and that way the flows of money can be considered, where it concentrates and where it is sparse. No one would search a desert for water, govt seems to turn people into either fools or monsters, maybe both.
I am not sure I follow all your logic, but am mpodering in haste and so will not quibble now
I think it was a variation on “those with the broadest shoulders” but trying to get away from thinking about people, as it’s not their shoulders that are broad, it’s the money that has broad shoulders. The other part was that those with the least spend what they get, which supports a local economy (their money is spread thinly and sparse like in a desert), but those with most save much of it (in vast lakes), so that money isn’t circulating, and they’re never going to spend it, so it may as well disappear as tax. Hand on heart, if I had to pick a label, I’d say I was an anarchist in the mould of David Graeber or Noam Chomsky, but more third generation, interested in processes of collective decision-making (as opposed to voting) rather than having all the answers. I find it absurd that we allow one person, such as Rachel Reeves, to make momentous (bad) decisions that detrimentally affect millions of people’s lives. Aligning CG tax with income tax would affect fewer people but raise more, as would limits to inheritance without loopholes. Targeting where wealth concentrates is preferable, since it’s excess money, often egregiously so. Unfortunately, that excess is used to buy political decisions.
This is the major idiocy (from the Guardian):-
“Government borrowing
Reeves announces new rules to not borrow for day-to-day spending. The current budget will be balanced within three years of forecasts.
The government will run a deficit of £26.2bn in 2026, but will achieve a surplus of £10.9bn in 2027-28, £9.3bn in 2028-29 and £9.9bn in 2029-30.
Public sector net debt will fall from £127bn in 2024-25, falling gradually to £70.6bn by 2029-20.
PW: Expect the forecasts of reduced borrowing and an eventual surplus to be much mentioned by ministers in the coming days and weeks, as they try to push back against the Conservatives’ charges of fiscal incompetence. The tougher rules on day-to-day spending will be seen as a balance to the relaxation of their equivalent on investment, as already announced.”
It will undermine the taxes increases! Labour as usual doing the work of Britain’s bankers who want less government money in the economy so people will be forced to borrow from them! This Kamikaze activity as usual will elude the majority of voters who prefer behaving like gullible children!
Government surpluses take money out of the economy
This is madness….
I spotted that too. Remember also that the foreign sector is also in surplus (the UK has a large trade deficit which is not going to change anytime soon). Which anyone with a passing acquaintance with the sectoral balances knows can only mean the private domestic sector (you, me, businesses) will take a hammering. And that is before you add in the ideologues at the BoE and there obsession with high positive interest rates.
Macro-economic illiteracy writ large. The only saving grace is that the economy will likely be heading for a major recession before any such surpluses are realised which will hopefully cause a very abrupt u-turn (though I won’t be holding my breath)
See my blog either later this evening or more likely in the morning now
You know what, I think that you are right.
I just heard that there are going to be more planning officers to get more housing built. To do what?- bend planning rules that they want to reduce? And with more NIC paid out of smashed LA budgets? Those planning officers will be on peanuts and likely to not want the job or hang around. So many have left already.
WTF?
What they need to do is employ more people to check the certifications for electrical installation, gas installation (where it is still being used) and other certifications (drainage and land remediation) that guarantee the quality of the housing in line with the building regs; the council of mortgage lenders approval etc., all of which from experience of practical completions since 2015 have been woefully inadequate – even worse since BREXIT.
The housing system needs more people (but higher NIC is required now), better trained people, lower interest rates, smoother supply chains (not with BREXIT) lower costs to function properly and more investment in low carbon technology. And I don’t see any of this.
My local Building Control team is ran ragged, exhausted and underfunded and has more to do post Grenfell to put the government’s own stupid regulation cutting right.
In terms of my area of the economy – this budget makes no sense from where I am standing. It will exacerbate problems, not mitigate them.
I think that we are going to see an explosion of house building everywhere, but a very poor product – dangerous, under regulated and poor value. It will be another Great British Housing Disaster that if Adam Curtis is around to see it, he will be doing yet another documentary on.
Oh dear………………………
Much to agree with
So the government is borrowing a lot of money in order to spend.
Are there any circumstances where the government spends without having to borrow?
no
Because all government spending creates new money and all money is techncially debt
But I would argue that some of that debt can be classified as equity – and that is the one exception to the rule
I may not grasp Employers NIC and I might be wrong, BUT
The issue as far as I can see is that in many business’s employers were creating part time rather than full time jobs to save on the employers NI and this move reduces the incentive to create part time instead of full time roles
Maybe
But watch the massive rise in the number of claimed self-employed contractors now
[…] have, in another post written before she even spoke, suggested that Rachel Reeves' Budget will be a disaster for small employers and the many more […]
Why has she lowered the threshold that employers have to pay NI on? Surely it would have made much more sense to make NI payable on the whole salary above the threshold? This would so affect higher earners, rather than when combined with the rise in the minimum wage hammer those employing people on lower salaries, in sectors like hospitality and care.
Agreed
I am agreeing with all the criticisms of the Budget being made on this page. (I knew I would!)
But my wife pointed out one aspect of the changes to employers National Insurance contributions that ,potentially, has advantages to some working people.
A few years ago, she worked shifts in a well- known clothing store. (The shop that you go to after the previous one if you see what I mean.) All the stores and other businesses seemed to use the same practice of only employing most workers on fewer hours than would oblige them to pay National In surance for them. Currently,before this budget, the earnings level was just above £9,000. This meant that, to earn more , many of the working people would literally dash out of the store st the end of the shift, to rush off to another shop to work a few hours,all while juggling child care, before trying to fit in a short shift in a pub/cafe etc.
Apart from the stress and inconvenience for the working people, the unfeeling business actually got a poor service from staff who were never at work for long enough to work out what was where in the storeroom because every one on short shifts stuck the stock wherever they thought. So lots of time was wasted in the backroom by hardly-trained staff. But the employer could avoid paying NIC so carried on with this practice which might be seen as a sort-of cousin of the “gig economy”.
Now that the earnings level has been reduced to £5,000 , the employers may consider taking people on for longer hours/shifts as they don’t make any savings by having two workers on short shifts instead of one on a longer shift. The “flexibility” of lots of short shifts may not be as advantageous to working people as imagined.
Of course, I have no idea if this lay behind these changes, or if Reeves had no idea that there might be actual benefits for working people in what she did.
NB . I have not used quotation marks round the term working people as, in this case , they clearly ARE precisely that.
I note your point – but I think inflation is the likely outcome in that case, or redundancies.
It’s going to hit service type sector jobs in adult and child care, retail and hospitality big time and come out in prices. Jobs will be lost and some businesses will go under. Totally bizarre for a so called Labour party.
The employer’s NI changes will hit small charities, churches and the like that employ staff part time staff or on low wages. The Employers’ Allowance on NI will increase, so they won’t pay NI on up to four full-time workers (or equivalent) on Minimum Wage – if I’ve done the sums right – but beyond that, they’ll pay more.
As if they aren’t under enough pressure already, filling in all the gaps in state welfare and similar provision.
Employers with maybe 3 to 4 people on minimum wage will not pay
Beyond that the measure is going to hit hard
Of course when we speculate about the affect of say, NIC rises, we assume that businesses will never just accept lower returns for the owners and shareholders. And we assume that businesses of all sizes are genuinely run so near to financial disaster that an unexpected cost leads to …well….disaster. Presumably,though, only the company accountants can know how close to the edge the business actually is.
I am reminded that the issue of ” resillience” was a popular talking-point for journalists etc after the 2008 crisis and then the damage done by the pandemic. And again, this site produced a very informative contribution on the iniquities of the Limited Liability situation,allowing careless business practices to persist. It is ,as they say , “all connected”, so we can,t change one thing without guarding against undesirable consequences. In the end, I share the despair about the thoughtlessness of Reeves increasing employers NIC . But, at the same time, we always have to advocate changes to gain generally beneficial results and the cry that “jobs will be lost” or “we will have to raise prices” sound a bit like the threat made by some to move themselves and all their talents abroad.
No, I know how small businesses work – I have advised many hundreds of them – and this threat is real
Why is labour so scared taxing the super rich? She could have halved the tax burden on business (especially small business) by going for the 2% tax rise on the super rich yielding £24Bn as indicated by Carla Denyer yesterday.
Reeves says she wants growth, well, doesn’t that come through employing more, well trained, better skilled workers? A budget for growth should surely incentivise productivity, and importantly investing in the right areas, £Bns going into Carbon Capture (prolonging fossil fuel industry) is insane. £Bns going into the NHS without a penny going into Social Care reform equally ridiculous.
The imbalance of this budget is particularly worrying because it points towards ministerial tunnel vision when the tragedy unfolding in Valencia right now clearly calls for vision that embraces the bigger picture.
[…] Before Rachel Reeves even delivered her Budget, I wrote this: […]