Reeves’ Budget measures risk hitting ‘working people’, analysts say

Chancellor Rachel Reeves’ vow to protect “working people” in the Budget has been called into question by business chiefs and analysts, who warn bosses will struggle to absorb a £20bn tax increase on top of an expected 6 per cent minimum wage rise and new labour laws. 

Economists said a hike in employers’ national insurance contributions, set to be the biggest tax-raising measure in Wednesday’s fiscal event, would weigh on wages and employment, or increase prices for consumers, while fuelling bogus self-employment. 

Raising £20bn via higher employer NICs would in effect reverse cuts to employee contributions by the previous Conservative government. Such a move would still leave the tax burden on UK employers and workers relatively low by international standards. 

But it would come on top of double-digit increases in the statutory minimum wage over the past two years, with the chancellor likely to announce in the coming days a further increase of about 6 per cent in the wage floor — matching average pay growth — from next April.

At the same time, reforms to employment law designed to boost workers’ rights will in effect drive up the cost of hiring. Official estimates suggest the reforms will cost business up to £5bn a year, with the biggest impact on low-paying sectors such as hospitality.

“If you are a small, consumer-facing business, you’ve come through Covid and are carrying more debt than you would usually, and the minimum wage has already gone up by 20 per cent . . . that feels like a challenge,” said Neil Carberry, chief executive of the Recruitment & Employment Confederation, of the expected changes.

Next year’s rise in the minimum wage was not by itself a concern, he said. But the “cumulative impact” of the changes would force many smaller businesses to squeeze wages or working hours “in the context of an economy that is not clearly growing strongly yet”, he added. 

Craig Beaumont, executive director at the Federation of Small Businesses, warned that changes to NICs would be especially tough for smaller employers. “Some are already weighing up cancelling pay rises, or reducing hours or voluntary pension contributions. Others may pause recruitment or expansion,” he said.

Ben Nabarro, UK economist at Citigroup, said a rise in the national living wage and new workers’ rights, on top of a jump in employer NICs, would add up to a “large increase in employment costs”.

He said: “This raises some concerns given the labour market is already softening. Traditionally firms would respond to a rise in employer NICs by reducing their labour bill in other ways, but if you fix the national living wage at a higher level, it becomes more difficult to do this via lower wages. That increases the risks around hours and headcount.”

Some economists said the impact would be felt primarily by consumers, not workers. Andrew Wishart, economist at consultancy Oxford Economics, said that as demand strengthened “cost pressures in sectors that rely on low-paid labour . . . are likely to be passed on to customers in the form of higher prices, adding to inflation”.

Jeremy Hunt, shadow chancellor, warned that the national insurance hit to employers would be passed on to workers through lower wage rises, a view taken in the past by the Office for Budget Responsibility, the fiscal watchdog.

“Every Labour government . . . has left office with unemployment higher than when it arrived,” Hunt said. “We were all hoping Rachel Reeves would be different but the hike in employers national insurance combined with French-style labour laws is making many businesses worry that history is repeating itself.”

A further side-effect of higher employer NICs will be to increase the incentives for people to work on a self-employed basis, potentially undermining new workers’ rights. 

Stuart Adam, senior research economist at the Institute for Fiscal Studies think-tank, said the £20bn rise would “worsen the tax bias . . . towards self-employment or working though one’s own company”. 

Adam Corlett, principal economist at the Resolution Foundation think-tank, said this would be “bad news for workers”, who would “miss out on the enhanced employment protections promised by the government, bad news for the efficiency of the economy, and bad news for the Treasury”.

Sir Keir Starmer said on Monday that the Budget would provide “stability” in the public finances and generate investment, both of which would promote growth and ultimately put more money into workers’ pockets.

But the prime minister said he could not rule out further tax-raising Budgets after his administration’s maiden fiscal event on Wednesday, in which he said Labour would “run towards the tough decisions”. 

“I can’t give you a cast iron guarantee that never again in any Budget will there be any adjustment to tax because we just don’t know what’s round the corner,” he told an audience in Birmingham.

Meanwhile Sir Lindsay Hoyle, House of Commons speaker, lambasted Reeves for having confirmed on a visit to Washington last week that she would rewrite her fiscal rules, rather than telling MPs first.

“It’s totally unacceptable to go around the world telling everybody rather than these benches,” Hoyle said. Downing Street said pre-briefing parts of Budget statements was a common occurrence.