Thursday, November 14, 2024

Rachel Reeves accused of business ‘betrayal as top back warns tax hikes will hit living standards

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Rachel Reeves’s increase in employer national insurance contributions (NICs) will hit workers’ living standards, Barclays has warned, amid growing backlash over the tax hike.

It comes as leaders of Britain’s biggest business organisations accused the Labour government of “betrayal”.

Economists at the bank said the policy would cause real incomes to take a hit, as companies pass on the cost of the levy through lower pay rises and higher prices.

This, they said, will leave people feeling poorer as prices rise faster than wages.

Despite a manifesto pledge not to increase taxes on working people – including NICs, income tax and VAT – the chancellor increased employers’ NICs from 13.8 per cent to 15 per cent at the Budget.

She also reduced the threshold at which employers start paying the tax, slashing it from £9,100 per year to £5,000.

In a note to clients seen by the Telegraph, economists at the bank said: “We expect the additional costs implied by changes to employer NICs to lead to lower real incomes, through a combination of higher inflation and lower wages.”

It comes as the prime minister has been urged to take “decisive action” to restore business confidence following the decision to hike employer national insurance contributions (NICs) – something business groups have described as a “betrayal”.

The chancellor argued that policy, which is expected to raise more than £25bn for the Treasury, does not breach Labour’s manifesto commitment because it does not show up on employees’ payslips.

Chancellor of the Exchequer Rachel Reeves (Jordan Pettitt/PA) (PA Wire)

Chancellor of the Exchequer Rachel Reeves (Jordan Pettitt/PA) (PA Wire)

However, businesses have urged the government to change course, warning they will be forced to “tighten their belts” as a result of the policy and claiming some are facing seven-fold increases in their bills as a result.

John Longworth, chairman of the Independent Business Network (IBN), dubbed the Budget “anti-growth”, while Dr Roger Barker, director of policy at the Institute of Directors, said the employer NICs increase takes “no account of whether a business is profitable or not”.

It comes after hospitality bosses wrote a letter to the chancellor warning that the changes are “regressive in their impact on lower earners”.

Mr Longworth told The Independent that Sir Keir Starmer has “betrayed himself and the nation with his first Budget”.

“He and the chancellor, persistently stated (correctly) that wealth creation and growth are the number one priorities on which all else depends. The Budget and other policies are anti-growth and will therefore fail”, he said.

He warned that the NICs increase will “either cause job losses, wage depression or lead to under-investment as a consequence of profit loss.”

Alex Veitch, director of policy at the British Chambers of Commerce (BCC), said the combined impact of the NIC increase and the increase to the National Living Wage means some firms are looking at seven-fold increases in their bills.

Ms Reeves raised the minimum wage by 6 per cent, handing a pay rise to more than a million workers on low incomes.

“Inevitably that means they are reassessing their plans around investment and recruitment in the short-term, as they tighten their belts”, Mr Veitch said.

“What they now need to see from the government is quick, clear and decisive action to show it understands the difficulty and is looking at ways to make their lives easier.

“That means a quicker planning system, faster grid connectivity, simpler ways to export, big improvements to infrastructure and an Industrial Strategy that supports them to grow.”

Meanwhile, Dr Barker said the policy is a “major blow for most businesses”.

“At a time when business confidence is low, hiring plans have already been hit by the government’s employment rights reforms, and the minimum wage is set to rise by more than inflation, this will hit employment prospects and earnings”, he said.

The policy came as part of £40bn worth of tax rises announced by the chancellor in October, as she promised to “fix the foundations” of the economy and plug a £22bn “black hole” in the public finances she claimed was inherited from the Conservative Party.

The chancellor admitted the increase in employer NICs would have an impact on wage growth, but asked: “What alternative was there?”

But Dale Vince, the green energy tycoon who has previously donated £5 million to Labour, called for a 2 per cent wealth tax to be introduced instead to raise funds for Treasury coffers.

He said the tax would “barely touch the edges for the very wealthy” and would raise “£24bn for our NHS, for child poverty, to save our planet”.

The figure cited by Mr Vince was originally calculated by campaign group Tax Justice, which campaigns for a “fair and effective tax system”.

However, there are concerns that the policy would drive high earners out of the country.

A letter organised by UK Hospitality warned that some jobs on minimum wage will become unviable as a result of the new threshold announced at the Budget, calling for a lower NICs rate of 5 per cent for lower earners.

Asda chairman Lord Stuart Rose suggested there will be rising prices as a result of the new rules, saying it is “a big burden for business to carry”, while Sainsbury’s warned of a £140 million hit.

The chancellor said her Budget will “wipe the slate clean after the mismanagement and the cover-up of the previous government”.

She told Times Radio: “I had to make big choices. I don’t want to repeat a Budget like this ever again, but it was necessary to get our public finances and our public services on a stable trajectory.”

The Treasury has been contacted for comment.

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