Workers have been warned their pay will be hit by Budget tax rises aimed at employers.
Firms will bear the brunt of the Budget’s £40bn total tax rise due to an increase in the National Insurance rate for employers as well as a reduction in the threshold at which they start paying it.
Businesses are likely to respond by holding back on pay rises, influential think tanks, the government’s independent forecaster and the chancellor herself have all said.
“It will mean that businesses will have to absorb some of this through profits and it is likely to mean that wage increases might be slightly less than they otherwise would have been,” Chancellor Rachel Reeves told the BBC.
James Smith, research director at the Resolution Foundation think tank which aims to improve living standards for low-to-middle income families, agreed.
“Even if it doesn’t show up in pay packets from day one, it will eventually feed through to lower wages,” he said.
“This is definitely a tax on working people, let’s be very clear about that.”
Other Budget measures, including a big boost to spending on public services are expected to raise inflation in the short term, which could prevent interest rates falling more quickly.
That will also have a knock-on effect on people’s spending power.
The government has pledged to make economic growth its priority and said people would have more “pounds in their pockets” by the end of the parliament.
In its general election manifesto, Labour promised not to increase taxes on “working people” – explicitly ruling out a rise in VAT, National Insurance or income tax.
The Budget has sparked a debate over how much of the tax rise firms can absorb.
The Office for Budget Responsibility (OBR) forecasts that by 2026-27, some 76% of the total cost of the NICs increase will be passed on through a squeeze on workers’ pay rises and increased prices.
The OBR expects that as a result of the Budget, average household income – which includes the impact of tax changes directly and indirectly, and benefits – will increase only slowly over the parliament.
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However, projected income growth is slightly faster than the 0.3% annual average between 2019 and 2024, a period which saw a series of economic blows including Brexit, the pandemic and energy price rises following Russia’s invasion of Ukraine.
The effect of an ageing population is also putting more stress on public finances, especially through higher demand for health services.
By 2028 real weekly wages – with price rises taken into account – will have grown by just £13 over the past two decades, according to the Resolution Foundation.
The Institute for Fiscal Studies (IFS) said the rise in employer NICs will affect larger firms hiring people on low wages the most, and could lead to fewer minimum wage jobs being available in future.
It also warned that lower pay rises could mean the measure raises significantly less than a forecast £25bn.
It highlighted a forecast by the OBR that it could end up raising “just” £16bn if, for example, businesses award smaller wage rises.
Paul Johnson, head of the IFS, also warned of likely further spending and tax increases part way through the parliament.
He accused the chancellor of playing the “same silly games” as previous governments by “pencilling in implausibly low spending increases for the future in order to make the fiscal arithmetic balance”.
“I suspect we’ll end up with even more spending, possibly considerably more spending than is currently planned,” he said.
“That will probably mean, unless she gets lucky with growth, more tax rises to come next year or the year after.”
Economic forecasts published by the OBR alongside the Budget suggest UK growth will pick up over the next two years, but then fall back to a more moderate pace, in large part due to Budget measures that are likely to push up prices and interest rates.
Mr Johnson described the forecasts as “pretty awful”.
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The Resolution Foundation also warned that the decision to frontload increases to spending on public services into this year and next means the Spending Review in the Spring will be tough.
Reeves has also left herself with a “relatively slim margin of headroom”, it said.
The chancellor’s new debt rule allows more room for manoeuvre but most of that money has already been used up, which means that even a small economic downturn could force the government to increase taxes further in the future, the think tank said.
Opposition parties were quick to criticise Reeves, with shadow chancellor Jeremy Hunt saying she had taken the “easy route” by “picking the pockets of businesses” to fund public spending.
He said the strategy would lead to “lower growth, lower living standards, lower wages, businesses employing fewer people.
“It’s businesses paying their taxes that pay for our public services and what we did not hear yesterday is a plan to grow the economy and that is what we need,” he said.
Liberal Democrats leader Ed Davey said the chancellor was repeating the mistakes of her Conservative predecessors.
“Raising employer’s National Insurance is a tax on jobs and High Streets, and it will make the health and care crisis worse by hitting thousands of small care providers,” he said.
Speaking to reporters on Thursday, the Prime Minister, Sir Keir Starmer, said his government had taken a “responsible” approach in order to “fix the foundations” of the economy.
