The recent increase in employers’ National Insurance contributions is predicted to dampen job growth across the UK.
- Employers’ NICs rose by 1.2%, raising concerns among economic experts about job creation.
- Projected government revenue from this increase might fall short due to slower wage growth and job opportunities.
- Economists emphasize the strain on lower-income households from ongoing inflation and tax threshold freezes.
- The volatility in bond markets reflects growing investor anxiety over rising government debt levels.
The National Institute of Economic and Social Research (NIESR) has characterized the rise in National Insurance contributions (NICs) as a ‘tax on jobs.’ They caution that this increase could suppress job creation and slow the growth of vacancies. The new budget raises employer NICs by 1.2 percentage points to 15% and reduces the threshold for employer NICs liability to just £5,000. This change is expected to generate £26 billion for the government. However, economic experts suggest that a slowdown in wage growth and limited job opportunities might reduce the expected tax yield to approximately £16 billion.
Stephen Millard, NIESR’s deputy director for macroeconomic modeling, pointed out that the NICs hike is anticipated to ‘reduce job creation,’ potentially causing a rise in unemployment in the upcoming years. Lower-income households, already grappling with rising inflation and frozen tax thresholds, are likely to feel the most pressure. Adrian Pabst, NIESR’s deputy director for public policy, recommended that raising income tax for high earners rather than maintaining personal tax threshold freezes would better support the living standards of those with lower incomes.
The budget’s alterations in tax policies coupled with an additional £28 billion annual borrowing have led to instability in the UK bond market. The recent 10-year government bond sale experienced its weakest demand in about a year, despite offering a higher yield of 4.475%. This indicates a cautious sentiment among investors who seem wary of escalating government debt. The National Institute predicts that inflation will exceed 3% by early next year, prompting the Bank of England to adopt a careful approach toward reducing interest rates. It is expected that the Bank will cut rates by 0.25% at its forthcoming meeting, with further gradual reductions anticipated until rates stabilize around 3.25%.
The persistent inflation and economic unpredictability are expected to reduce UK growth significantly. The think tank forecasts minimal growth of 0.9% in 2024, a moderate rise to 1.2% in 2025, and a slight increase to 1.4% in 2026. Currently, the unemployment rate stands at 4.2% on average, but it’s predicted to decline slightly before rising steadily over the next few years, demonstrating the challenging economic conditions.
The economic outlook remains cautious as changes in tax policies and inflation trends pose challenges for job creation and overall growth.
