Rachel Reeves, UK chancellor of the exchequer, outside 11 Downing Street ahead of presenting her budget to parliament in London, UK, on Wednesday, Oct. 30, 2024.
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LONDON — British businesses are smarting after Finance Minister Rachel Reeves’ bumper tax-rising budget, with analysts warning that the measures could slow hiring and push up inflation.
An increase to the National Insurance (NI) payroll tax paid by employers was by far the largest revenue raising measure announced Wednesday, with Reeves forecasting the move would raise £25 billion ($32.3 billion) per year over the course of the parliament.
Under the new rules, employer NI will rise by 1.2 percentage points to 15% from April 2025, while the level at which employers start paying NI for workers will drop from £9,100 to £5,000.
The widely anticipated employer levy allowed Reeves to honour the Labour government’s manifesto pledge not to raise taxes on “working people,” while going some way in plugging what she has claimed is a £22 billion public funding “black hole.”
But business and industry analysts — as well as the opposition Conservative party — have slammed the move as disingenuous, saying that it would ultimately hit employees by limiting companies’ ability to boost wages and hiring. That, they said, would in turn undermine the government’s pro-growth agenda.
This is a false dichotomy.
Roger Barker
director of policy at the Institute of Directors
Roger Barker, director of policy at the Institute of Directors, a professional network for business leaders and entrepreneurs, described the tax burden as “greater than expected” and a “major blow” for business.
“This is a false dichotomy,” Barker said Wednesday following Reeves’ announcement. “The effects of higher National Insurance costs will hit profits in the near-term before being passed on in lower wages and lower employment,” Barker added.
‘A tough budget for business’
Businesses will also face higher costs to employ their lowest paid workers from next April, with increases to the U.K.’s minimum hourly wage confirmed by Reeves Wednesday.
Minimum hourly pay for over 21-year-olds will rise by 6.7% to £12.21, while the equivalent for 18 to 20-year-olds will rise 16% to £10. The headline corporation tax threshold, meanwhile, will remain capped at 25%.
Reeves said small business would be sheltered from the biggest impact of the changes, with an increase to the employment allowance to £10,500 from £5,000, which she said would allow firms to employ up to four minimum wage workers full time without paying employer NI.
However, industry figures suggested the measures would do little to support the vast majority of the country’s 5.5 million small and medium-sized businesses.
Coffee sign outside a cafe in the City of London on 28th August 2024 in London, United Kingdom.
Mike Kemp | In Pictures | Getty Images
“It will be another huge pressure piled onto business owners that already face crippling cash flow problems and increasing operational costs,” Andrew Martin, CEO and founder of SMEB, a payments platform for SMEs.
Rain Newton-Smith, chief executive of the Confederation of British Industry, a business interest group, described it as a “tough budget for business.”
“While the Corporation Tax Roadmap will help create much needed stability, the hike in National Insurance Contributions alongside other increases to the employer cost base will increase the burden on business and hit the ability to invest and ultimately make it more expensive to hire people or give pay rises,” Newton-Smith said.
Economic impact
The Office for Budget Responsibility, a government-funded but politically neutral body which assesses the Treasury’s fiscal decisions, said that Reeves’ raft of tax raising and public spending measures were likely to boost economic growth in the near-term but also raise inflation. That is because businesses could pass on the additional costs to consumers by increasing the price of their products.
Speaking to CNBC Thursday, Morgan Stanley’s global head of corporate credit research, Andrew Sheets, echoed that view.
“This is probably going to raise our forecast for growth in the U.K. over the near-term, but it could also provide a little bit of upward pressure on inflation,” he told CNBC’s “Squawk Box Europe” on Thursday.
Maybe the Bank of England cuts rates a little bit slower than we initially thought.
Andrew Sheets
global head of corporate credit research at Morgan Stanley
Goldman Sachs on Thursday raised its forecast for U.K. core inflation by 0.2 percentage points through 2025, setting its estimate for the reading at 2.5% by December 2025, and citing the impact of the change in NI contributions. Headline inflation is seen rising by a slightly lower 0.1% to reach 2.3% at the end of next year, due to the mitigating impact of a freeze on fuel duty, it said.
The bank also raised its 2025 gross domestic product (GDP) forecast to 1.6% from 1.5%.
Analysts, including at the OBR, say Wednesday’s announcement could now see the Bank of England slow its pace of monetary easing, which would keep business borrowing costs high. Markets are currently pricing in an 80% chance that the central bank will cuts rates by 25 basis points when it meets next week.
“Maybe the Bank of England cuts rates a little bit slower than we initially thought,” Morgan Stanley’s Sheets noted.
Goldman said it expects the BOE to move ahead with next week’s cut, but added that Reeves’ plans could “reduce the urgency for sequential cuts in the near term,” deferring its expectations of a December cut.
“Looking into 2025, we maintain our forecast for sequential cuts from February as we still expect inflation to cool materially and UK rates remain notably restrictive. That said, we now forecast Bank Rate to fall to 3% in November 2025 (vs. 2.75% previously) and see more uncertainty around our baseline forecast,” the Goldman Sachs note said.
