Workers warned that tax increases to the budget would hit their wages

Workers have been warned that their wages will suffer due to higher government taxes aimed at employers.

Firms will bear the brunt of the overall £40 billion increase in fiscal taxes 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 off on raising wages, influential think tanks, an independent government forecaster and the Chancellor herself said.

“This will mean that businesses will have to absorb some of this gain through profits, and it will likely mean that wage growth may be slightly lower than otherwise,” Chancellor Rachel Reeves told the BBC.

James Smith, research director at the Resolution Foundation, a think tank that aims to improve the living standards of low- and middle-income families, agreed.

“Even if it doesn’t show up in pay packages from day one, it will eventually lead to lower wages,” he said.

“This is definitely a tax on workers, let’s be clear about that.”

Other fiscal measures, including large increases in spending on government services, are expected to raise inflation in the short term, which could prevent interest rates from falling faster.

This will also have an indirect impact on the purchasing power of the population.

The Government has vowed to make economic growth a priority and said people will have more “pounds in their pockets” by the end of Parliament.

In its election manifesto, the Labor Party promised not to raise taxes on “working people”, explicitly excluding increases in VAT, National Insurance or Income Tax.

That promise has come under scrutiny, with some claiming Labor broke it by raising employers’ National Insurance Contributions (NICs), which the government denies.

The budget has sparked debate over how much of the tax rise firms will be able to absorb.

The Office for Budget Responsibility (OBR) forecasts that by 2026-27, around 76% of the total cost of the NIC increase will be passed on through cuts to workers’ pay rises and price increases.

As a result of the Budget, the OBR expects average household income, which includes the direct and indirect effects of tax changes as well as benefits, to rise only slowly compared with Parliament.

OBR chart showing household income growth over the years — (BBC)

However, projected earnings growth is slightly above the 0.3% annual average between 2019 and 2024, a period that has seen a number of economic shocks including Brexit, the pandemic and rising energy prices following Russia’s invasion of Ukraine.

The effect of an aging population also places greater strain on government finances, especially as demand for health services increases.

By 2028, real weekly wages (adjusted for price rises) will rise 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 would have the greatest impact on large firms employing people on low wages and could lead to fewer minimum wage jobs available in the future.

He also warned that the lower pay rise could mean the measure would bring in significantly less than the £25 billion forecast.

It highlights the OBR’s forecast that it could ultimately raise “just” £16 billion if, for example, businesses provided smaller pay rises.

Paul Johnson, head of the IFS, also warned of possible further spending and tax rises as they move through parliament.

He accused the Chancellor of playing “the same stupid games” as previous governments by “prescribing implausibly low future spending increases to balance the budget arithmetic”.

“I suspect we will end up with even more spending, perhaps significantly more than currently planned,” he said.

“That will likely mean that if she’s unlucky with growth, there will be even bigger tax increases next year or the year after.”

Economic forecasts published by the OBR alongside the Budget suggest UK growth will accelerate over the next two years but then return to a more moderate pace, largely due to Budget measures likely to push up prices and interest rates.

Mr Johnson called the projections “pretty dire”.

Bar chart showing UK economic growth forecasts for March and October 2024. According to the latest OBR forecast, GDP will grow by 1.1% in 2024, 2.0% in 2025, 1.8% in 2026, 1.5% in 2027, 1.5% in 2028 and 1. 6%. % in 2029. Projected growth rates in March were similar to 2024, although there were no figures for 2029. — (BBC)

The Resolution Fund also warned that the decision to increase spending on public services this year and next meant a spending review in the spring would be difficult.

Reeves also left herself “relatively little headroom,” the report said.

The Chancellor’s new debt rule gives more room for manoeuvre, but most of that money has already been spent, meaning even a small economic downturn could force the government to raise taxes further in the future, the think tank said.

Opposition parties were quick to criticize Reeves, with shadow chancellor Jeremy Hunt saying she had taken the “easy route” by “plundering the pockets of businesses” to fund government spending.

He said the strategy would lead to “slower economic growth, lower living standards, lower wages, and lower factory employment.

“Businesses pay taxes for our government services, and yesterday we didn’t hear about a plan to grow the economy, and that’s what we need,” he said.

Liberal Democrat leader Ed Davey said the chancellor was repeating the mistakes of his Conservative predecessors.

“The increase in employers’ national insurance is a tax on jobs and high streets and will worsen the health and care crisis, hitting thousands of small care providers,” he said.

Speaking to reporters on Thursday, Prime Minister Sir Keir Starmer said his government was taking a “responsible” approach to “fix the fundamentals” of the economy.

Workers warned that tax increases to the budget would hit their wages

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