Rachel Reeves has indicated that UK businesses could "absorb" her proposed increases in employer national insurance contributions by accepting decreased profits or identifying efficiencies, instead of passing on reduced wage increases to workers.
On Sunday, the chancellor defended her inaugural Budget, asserting that when considering the entirety of Labour’s extensive tax, spending, and borrowing proposals, it fosters "good for employment growth and wages growth."
Reeves informed Sky News’s Trevor Phillips on Sunday Morning that businesses faced a "choice" concerning her decision to generate £25 billion through an increase in employer NICs.
"Businesses will now have to make a choice, whether they will absorb that through efficiency and productivity gains, whether it will be through lower profits or perhaps through lower wage growth," she stated.
Starting from April, the rate of employer NICs is set to increase by 1.2 percentage points to 15 percent, and the earnings threshold for employer contributions will decrease from £9,100 to £5,000.
These changes have prompted backlash from businesses, charities, and GPs, along with warnings that the new measures might risk job losses for low-paid staff within labor-intensive areas of the economy.
Reeves has shielded the public sector from the impact of the NICs rise by allotting funds in her Budget to cover the tax increase costs.
The Budget on Wednesday, Labour’s first since 2010, involved £40 billion in tax increases, mainly targeting businesses and the wealthy, aiming to support increased day-to-day spending and £28 billion of additional annual borrowing for investment.
These measures temporarily raised the cost of UK government debt; however, by Friday’s end, the gilt markets had stabilized.
On Sunday, Reeves expressed confidence in the UK’s ability to handle its national debt servicing costs, even with interest now surpassing £100 billion annually. She also conveyed confidence in the British economy’s resilience to withstand economic shocks like the COVID-19 pandemic or surges in energy prices.
Reeves admitted she was “wrong” in her pre-July general election statement that tax hikes would not be necessary but reiterated her claim that the previous Conservative government had concealed a “black hole” in the nation’s finances.
The Budget represented Labour’s effort to reset the economic narrative following what it sees as the Conservative administration’s “mismanagement,” stating: “It’s now on us.”
However, some analysts, such as those at the Institute for Fiscal Studies, have cautioned that the government might need to raise additional billions later in the parliamentary term to prevent real-term cuts to certain public services.
Reeves, however, insisted, "We’ve put everything out into the open, we’ve set the spending envelope of this parliament, we don’t need to come back for more, we’ve done that now."
The chancellor’s decision on NICs has led to allegations that Labour breached its “triple tax lock” election promise, but Reeves emphasized that the party’s tax commitment included a caveat in its manifesto.
The promise indicated that income tax, VAT, and NICs would not rise with respect to “working people”—implying it applied to employee NICs and not employer contributions.
When questioned if the caveat implied the employer NICs rise was planned in advance, she maintained emphatically that Labour had not devised—or even discussed—plans to increase it before the election.
"This was not something that was on the agenda before the election," Reeves stated on the BBC’s Sunday with Laura Kuenssberg program.
Later on the same broadcast, Kemi Badenoch, the newly appointed Tory opposition leader, described the NICs increase as "not coherent" but did not clarify whether her party would reverse it.
She did, however, express clearly that the Conservatives would eliminate Labour’s VAT on private school fees if they assumed power.
