Rachel Reeves increased the minimum wage, the rate of employers' national insurance and the amount of income on which that charge is levied in her Budget. Now, every labour-intensive activity in the country, from the NHS to teaching and childcare as well as hospitality, and many smaller businesses are rightly complaining. Reeves made a massive mistake. She has to change her mind.
This is the audio version:
This is the transcript:
Rachel Reeves' Budget is beginning to fall apart. Most Budgets do. Hers is. There's nothing surprising about that. Perhaps what is surprising is that I forecast in advance exactly why she would run into trouble.
She's run into trouble over one very glaringly obvious policy measure that she announced in advance of the Budget, like so much else, which was the increase in employers' national insurance from 13.8 per cent to 15 per cent, which she claimed she could do without breaking her election promise not to increase the rate of national insurance, or income tax, or VAT on what she calls working people. Well, she did increase the rate of national insurance on working people because employers' national insurance is a tax that is effectively part of the total wage package that an employer thinks about when they employ somebody. I assure you that's true. That's what I do when I employ somebody, and she ignored that fact and put up that rate.
Worse still, she increased the amount of an employee's salary that is now subject to employers' national insurance, reducing the limit at which national insurance had to be paid from £9,100 of equivalent earnings a year to £5,000.
The consequence is that many employers in the UK have seen a significant increase in their potential national insurance liabilities which will start to be paid from the 6th of April 2025.
I say many because some employers will not see that increase. Small companies who employ two or three people, probably around minimum wage, are unlikely to see their national insurance bill rise because they have an exemption from paying the first £10,000 of employers' national insurance contribution, which is good for them.
Large companies do not have a problem with this increase, although they will moan, because most of them are quasi-monopolists, by which I mean they can afford to pass on the cost that they incur to the consumer, because, relatively speaking, consumers are price insensitive with regard to their products, particularly after a period of inflation where people aren't completely sure what the price of anything is at present. They are probably going to be immune to the effects of this charge.
But in between those very large companies with very loyal customer bases and those small companies who are not going to be paying this increase, there are a host of smaller and middle-sized employers who employ a very great many people in the UK.
Roughly half of all employees in the UK work for smaller companies. Most of those work for the companies that I'm talking about. Smaller businesses employ relatively few people overall, apart from their owners. Larger companies employ half the population and I include the state in that number as well.
But in between are all these other companies. And what do they do?
If you are one of these employee-intensive businesses, you are going to employ a lot of people. Hospitality, for example, engages a very great many people, often on minimum wage.
The chefs in the kitchen will be a serious part of your employment cost.
So will the number of waiting staff, or bar staff, or whatever else.
All those people are now going to see an increase in their cost of employment. And that's also true because simultaneously with increasing the national insurance cost, Rachel Reeves unwisely increased the minimum wage. I don't think the increase in the minimum wage, by the way, was the unwise bit. I think increasing the employer's national insurance cost whilst increasing the minimum wage was the unwise bit.
We see the same thing in social care, which is an intensely, obviously, people-based service.
We see the same in the building industry, where, actually, a lot of the cost of putting up many buildings is in the people who have to be employed on site.
We see the same in-home services, whether that be repairs, or whether that be DIY services supplied by the local painter and decorating company who might employ a range of people to provide the services.
My point is that there are a large number of employers that are going to suffer this increase. And it's not just in the things that you might think about first of all. Many charities are also in this situation. They employ staff to supply services for free but will now need considerable extra support from their donors to cover this increased cost.
And childcare for those under the age of five is normally supplied by commercial providers. If that's the case, then we do know that there's going to be significant pressure on those commercial providers to pass on the cost of childcare to the consumer, which is the parent. And many of those parents are already stressed by the cost of having to provide childcare for their children with a local nursery whilst they go to work.
And this is also going to have impact, of course, on the state sector because although Rachel Reeves says she might compensate some parts of the state sector for the costs that they incur, there is no guarantee that this will be right across the board.
There's been no mention of local authorities being compensated for this issue, and that will feed through into the social care system.
There's been no mention of the NHS being compensated entirely for this, and it doesn't look to me as though it has been.
And as for teaching, no, I don't think that's been compensated for either.
In other words, Rachel Reeves has created a time bomb that is going to explode in April 2025, which is going to be this additional cost, which many employers will not know how to manage.
I am well aware that hospitality is, for example, now complaining about this increase. I had a discussion recently with somebody who is a manager in a hospitality industry employing quite a lot of people, and they just put it to me that, frankly, this was enough to wipe out their already narrow profit margins. That puts their business at risk. Yes, their employees are paid more, but because of the employer's national insurance, their chance of maintaining their employment might be reduced. Or at the very least, and as the manager put it to me, she's going to have to think and scrimp and save and maybe cut staffing on some shifts, reduce the quality of the service, and reduce the amount of training. All of that is worrying.
My point is very simple. I said in advance of the Budget that this was going to be a disaster for West Streeting and the NHS. I also mentioned then that it would be a disaster for care homes and child care, and I think it's going to be a disaster for many more organisations, in particular in the small business sector.
Because of that, Rachel Reeves really does need to think about whether she's got this right. I do think she might have to make some change. I am not convinced that she can do three things simultaneously:
- Increase the minimum wage
- Increase the employers' national insurance rate, and
- Increase the amount of employers' cost to which that rate applies.
She may be going a step too far. If she does not reverse this, I do believe we will see significant increases in unemployment. We will see inflation, and we will see the economy as a whole move towards a recessionary environment. None of those things are good for the people of the UK. They're the complete opposite of what Labour said it wanted.
She's made a mess. It's time she acknowledged it. This was a bad decision made for poor political reasons. And she has to correct it.
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Well she will not admit any of her many mistakes. She and her fellow travellers will continue to deny that any mistakes have been made. It will end in tears and Labour will be damaged as trust in them continues to decline.
Have you noticed how her smug grin has disappeared? She has a face like a slapped cod now. it’s obvious that the job is too much for Mrs ” I’m an economist” and whose answer to everything is her phantom £22 billion black hole. I want to know what she is going to do with all the tax she’s raising on top of the highest tax burden left by Sunak. it sure isn’t going into helping anyone in this country, not the pensioners, not workers, not the NHS, nor workers. What help she holds out is too little, and very much too late.
Richard,
You have already discussed bringing the tax treatment of earned and unearned income into line and the various issues around NI.
It seems to me that we need to address the question about why we tax labour through both NI & VAT. As a local builder pointed out he charges £300/day for labour – obviously this includes tools, ‘odds and ends’ and the his van and 20% of that immediately disappears in VAT. Thats before you take NI off.
Surely he charges £300 plus Vat?
Otherwise he charges £250 plus vat a day for labour. The point is important.
‘No plan survives first contact with the enemy’ said one German general.
So, it implies a Plan B and even a C.
In Reeves case however, I do not see a plan at all. It all seems ‘reactive’.
She is pleading poverty – effectively tying her own hands together – and expecting everyone else to put their hands in their own pockets as you have most accurately noted noted previously.
As you say, this cannot work, but I find her plans for the LGPS funds even more worrying as she is effectively handing over other people’s money to institutions whose behaviour is both extremely dubious and has proven to be totally unreliable over the years.
She has boxed herself in or is on the way to doing so. That scared looking woman you saw at Larry Elliot’s retirement do seems to be sealing up her ‘sarcophagus’ from within.
The manifesto commitment was, to give the full quote:
“We will ensure taxes on working people are kept as low as possible. Labour will not increase taxes
on working people, which is why we will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.”
There are three statements here:
* keeping taxes on working people as low as possible
* not increasing taxes
on working people
* not increasing National Insurance, or the basic, higher, or additional rates of Income Tax, or VAT.
Note the “which is why”. That indicates that the following promises are motivated by the first part of that sentence. But they are not limited by it.
But they appear to have got away with reframing the manifesto commitment after the event. The words mean just what they choose them to mean, neither more nor less.
Indeed
I agree with you 100%..raising the minimum wage and the changes to National Insurance are recessionary and will impact also heavily on those looking for part time work like students in holidays. She has received terrible advice on this. Similarly the advice given on VAT on school fees is just as misguided as it will end up costing more to the taxpayer as the sheer numbers that will fall back into the State system will be much more than the additional tax revenue. Add in the pensioners winter fuel allowance and it has truly been a disastrous start for the Labour administration.
We will have to disagree on VAT on school fees. This is not just a tax issue.
Exactly. We want them to fall back into the state system. As many as possible. Preferably all. This is not a question of finance, but society.
Given the (foolish) attachment to “fiscal rules”, taxes had to rise. However, at each and every stage where taxes on “non-wage income” could have been levied they were not… or the punches pulled; taxes on labour rose.
Why? Special interest lobbying and politicians believing the bullshit.
Furthermore, even if the lobbyists are correct and a few folk “leave the country”, “don’t save for old age”, “become less entrepreneurial”… or whatever the special pleading is, it is a small price to pay for a move to greater fairness. Hard times are here for some and coming for many more….. only a fairer system makes it bearable.
About a week ago I responded to my Labour MP’s paroting of the copy-and-paste reply paragraphs I imagine that Millbank have staffers to produce and distribute to make sure their MPs are staying on message (with the added bonus that it shortens their own staff’s time dealing with each communication). The pro-forma repeated the nostrum about making sure the country could afford whatever implying that they would only spend what they raised in taxes.
I pushed back with arguments familiar on this blog and added that “when” Rachel Rieves’ budget frayed, perhaps my MP might like to review some other macroeconomic approaches (pointing to one of your posts and an MMT primer mooc -you probably know the one). If you’re right, Richard, that fraying may begin to occur sooner than I, at least, imagined.
I fear so…
From memory, the NI changes are to raise £27bn of the £44bn that the budget aims to raise. How can she imagine that level of cost to business can just be absorbed without inflation-busting price increases and growth and employment destroying effects?
Interestingly I wrote to my MP with my concerns on a number of issues, six weeks later I received an obviously standard reply on the black hole and nothing on the other issues. My letter was informed by this blog. Really pathetic.
It takes a certain type of genius from a Chancellor to introduce a measure that is simultaneously both inflationary and going to cause a rise in unemployment. What it indicates is a complete lack of courage from politicians and the total fetish that successive governments have made about things like the basic rate of income tax since 1979 which under no circumstances must be raised. This dishonesty has effectively led successive governments to use sleight of hand tactics such as claiming freezing personal allowances and raising employers NIC are not taxes on working people. The situation is made worse by the incoherence of government policy which simultaneously wants to reduce carbon emissions to zero but refuses to reintroduce the fuel duty escalator on petrol and diesel for vehicles. Of course, this hypocrisy also extends to sections of wider society that want better public services just so long as somebody else pays for it ( ie US style tax rates with European levels of social support). This collective delusion has now reached its end point and these contradictions cannot survive much longer.
The government is following neoliberal classical economics. The last 45 years since Thatcher has demonstrated that it has not worked.
The financial markets have enriched the bankers.
Selling off British assets have enriched their new owners.
Private Finance Initiatives have enriched the very few.
British energy, oil and gas, have enriched the multinationals.
The only people to have lost out over these years is the vast majority of us, who have seen the value of our wages fall, house prices rise, the highest energy costs are rail fares in Europe, polluted rivers and waterways, crumbling schools and potholes everywhere.
And Labour are continuing with more of the same.
Not optimistic.
Its going to hit the South West really badly. We’re largely a low wage economy with industries like hospitality already struggling. The double whammy of rightly raising the minimum wage but cutting the NI threshold so even part time workers will have to be paid for will result in job losses, transfer to self employment and businesses you going under. The worry is the impact on youth employment.
I imagine it’s less of a problem in London where many work for larger companies and wages are much higher.
Why or why didn’t she raise the NI ceiling which might affect safe rises for the well paid not result in job cuts? And why not reverse the unnecessary NI cut from the previous government?
Political stupidity is the answer to all your questions
I agree. But 4 months to come with something so obviously disastrous! Surely the basic modelling would show how inept it was?
I do think it’s partly London centric thinking and they have no idea how much less prosperous the areas outside the South East are.
The only conclusion here after the GE is we have exchanged the party of corruption and cronyism for the party of incompetents and financial illiterates. Even our man at the BoE this week admits Brexit is a failure so who the hell is going to save us when none of the mainstream leaders has the 6@££s to say so. I bloody despair!
In a funny way, Reeves is following the Trump policy. ” Never back down, never apologise, never admit mistakes”. It seems to have worked for Trump, not because more people voted for him. He just lost fewer votes than the Democrats this time. A bit like the Starmer Party winning because ,despite gaining fewer votes than Corbyn , they didn t lose as many as the Tories. I think Reeves will stick to her failed policies because she thinks its too soon to acknowlege problems and it looks impressive to refuse to change. Politics as performance!
One Australian study on the economic incidence of similar policy problem finds:
Results from the difference-in-difference analysis provide similar results and suggest that between 71% to more than 100% of increases in the superannuation guarantee are offset by lower wage growth; workers bear most of the incidence of increases in the superannuation guarantee.
https://treasury.gov.au/sites/default/files/2020-07/01-r2019-100554.pdf
Although this is contested.
I think your last point is what needs to be known