Going for broke: why Reeves' NIC hike won't work

The Budget increase in employer's National Insurance Contributions seems set to be a fiscal flop, looking at the bigger picture.

Employer's NIC is increased from 13.8% to 15%. Also the threshold for beginning to pay NIC drops from £9,100 to £5,000 per employee. On the other hand from April 2025 the Employer's Allowance - a discount on the total bill - increases from £5,000 to £10,500.

Who gets hit?

PUBLIC AND VOLUNTARY SECTOR

• Local Authorities are already under growing financial strain. An extra £4.7 billion has been earmarked in the Budget to compensate them, but there is uncertainty whether it will be sufficient, especially since contracted-out services like social care providers are not covered.
• Parish and town councils will not qualify for compensation at all and expect the additional cost to them will be £10 million.
• The voluntary and charity sector, also struggling, estimates that without similar compensation or exemption the NIC hike will cost it £1.4 billion and impact services.
• GPs estimate it will cost them £260 million.
• The NHS is to receive an extra £22.6 billion (excluding capital expenditure) over two years and, says the Chancellor, 'needs now to live within that budget.'

PRIVATE SECTOR

• Small businesses with employees on average wages will see little difference in their NIC costs, maybe even a small saving in some cases. But medium-sized and larger employers will pay significantly more than before - compare Scenarios 4 and 5 in this explainer.

CONSEQUENCES

The public sector thinks to lose out by upwards of £1.5 billion, even after financial help from the Government. It may adjust its budget by reining in pay increases, cutting staffing and limiting services that the State would like to see continued or extended.

In the private sector the medium and larger enterprises face a significant extra burden, in an economic climate that is already difficult. But they also have the resources and now an additional motivation to accelerate the trend towards replacing people with machines. AI, robots and automated checkouts don't get sick or sue their employers.

Taxing employment may have more success in reducing it than with harmful indulgences like alcohol and tobacco.

A Labour Government claiming to represent the interests of 'working people' may see fewer of them and more claiming benefits instead.

Changing the rules on how public debt is measured may allow the Chancellor to borrow more, but there will come a point when the existence of the Welfare State as we have known it is threatened.

Rather than go for broke, the Government should consider retrenching - on vanity projects like HS2, on foreign aid and foreign war, on expensive new-Eden energy ideas that make our industry increasingly uncompetitive, on 'restoring our role as a climate leader on the world stage'…

We have to cut our coat according to the cloth.