Labour Chancellor Rachel Reeves has indicated a tax hike, which may be inevitable after a significant rise in public borrowing. This comes after new figures showed that the government borrowed £51.4bn in the first four months of the financial year, which is £4.7bn more than anticipated by the Office for Budget Responsibility (OBR). Reeves said she was “shocked” by the state of public finances, blaming the previous Conservative government for leaving a “black hole” in the budget.
Reeves’ comments coincide with suggestions by Darren Jones, Chief Secretary to the Treasury, that employers’ National Insurance contributions could be a target for an increase in the upcoming Autumn Budget on 30 October. Jones suggested that while Labour would honour its pledge not to increase employee National Insurance, income tax, or VAT, other tax measures may be necessary. This shift in tone has raised concerns about a possible rise in employers’ National Insurance contributions, commonly referred to as the “jobs tax.”
Employers’ National Insurance is currently set at 13.8% on staff earnings, and any increase could have significant consequences for businesses. Business leaders have raised concerns that such a hike would lead to reduced wages, stunted job growth, and higher unemployment.
Neil Carberry, chief executive of the Recruitment and Employment Confederation, warned that increasing the tax would drive up the cost of employment, potentially limiting businesses’ ability to hire staff and offering lower wages to those already employed. Tina McKenzie, Policy Chair of the Federation of Small Businesses, echoed these concerns, calling any increase in National Insurance a breach of Labour’s manifesto promises. McKenzie said that Labour had made a “cast-iron” commitment to avoid increasing this tax on small businesses.
The Conservative Party also criticised the potential tax rise, calling it “blatantly dishonest” and accusing Labour of backtracking on its election promises. They claimed that any increase would raise the cost of employing workers, leading to more job losses and slower economic growth.
The rise in borrowing is largely attributed to a series of public sector pay rises announced by the Labour government, including a 22% pay increase for junior doctors. The OBR noted that public sector pay growth contributed significantly to the overshoot in borrowing figures. Laura Trott MP, Shadow Chief Secretary to the Treasury, criticised the Labour government’s handling of public finances, accusing them of fuelling the borrowing crisis by approving inflation-busting pay rises.
Economists have proposed several solutions to bridge the budget gap, with a one percentage point increase in employers’ National Insurance potentially generating an extra £8.9bn annually. Another option being considered is extending the freeze on the wage threshold for National Insurance contributions instead of increasing it in line with inflation.
While no final decisions have been made, Rachel Reeves emphasised that difficult choices would be required to restore Britain’s finances. She said that Labour’s focus was on repairing the economic damage caused by 14 years of Conservative government, but warned that recovery would take time.
Ms Reeves added: “We won’t be able to repair the damage of 14 years of chaos overnight, but this government is ready to do the hard work necessary to fix the foundations of our economy, rebuild Britain, and make every part of the country better off.”
A Treasury spokesperson reiterated that no decisions had been made and that any announcements about tax changes would be made in the upcoming budget. However, they reaffirmed that Labour remained committed to its manifesto promises, despite the challenging economic environment.
With public borrowing exceeding expectations and the Labour government under pressure to maintain its fiscal responsibility, the potential for a National Insurance hike remains a looming concern for businesses and workers alike.
