LABOUR tax hikes on employers will cut workers' pay, according to a leading think tank – as the party is forecast to fail in its flagship mission to significantly boost growth.
In her first Budget as Chancellor, Rachel Reeves announced that National Insurance contributions from employers would rise to 15% from April – with the threshold for paying lowered to when an employee earns £5000.
Paul Johnson (below), the head of the independent think tank the Institute for Fiscal Studies, said this was a £25 billion tax rise “proportionally hitting harder those employing lower paid workers”.
He added: “Probably three quarters or so of the increase will flow through to lower pay.”
Writing on Twitter/X, he said: "OBR has downgraded forecast of household income growth due in part to a 'substantial part of the employer NICs increase being passed onto real wages'.
"To be clear, the Government HAD to increase income tax, NI or VAT. But to suggest this doesn't impact people's incomes is ludicrous."
Growth forecasts were slashed in the wake of the Budget, with UK growth now not expected to peak at 2% in 2025 and roughly flatlining in subsequent years, according to the independent Office for Budget Responsibility (OBR).
That is despite Keir Starmer setting a growth target of 2.5% GDP growth during the election campaign.
Average household disposable income will fall in real terms compared to the pre-pandemic average, the OBR said.
Disposable income per person is forecast to grow by an average of just over 0.5% per year until 2030, below the 1% per year in the decade until Covid.
While disposable income will increase by a total of 3.5% over the next six years, the OBR said extra National Insurance payments for employers and other taxes dragged down stronger growth.
Speaking in the Commons on Wednesday to unveil the first Labour Budget since 2010, Reeves announced that she was putting taxes up overall by £40bn – thought to be a record rise.
Reeves said: “I know that this is a difficult choice. I do not take this decision lightly.”
The UK Government has pledged a £3.4bn settlement for Holyrood, which it says is the biggest in the history of devolution outside of the pandemic.
The Treasury has confirmed it will stump up an extra £500 million to offset rising National Insurance contributions for the public sector in Scotland.
Capital gains tax will go up, with the lower rate increased to 18% and the higher rate up from 20% and 24%.
Changes to Inheritance Tax will bring pension pots into the scope of the levy, with additional reforms to agricultural and business property reliefs, raising a total of £2bn a year.
There will be an increase in alcohol duty in line with the RPI measure of inflation in a move which has enraged the Scotch whisky sector.
An exception has been made for draught duty, which will be cut to knock a penny off the price of a pint in the pub.
The markets gave a lukewarm reaction to the Budget, with the pound strengthening after the Chancellor’s statement while the FTSE 100 Index dipped by 0.6%, keeping it in the red.
Strathclyde University’s Fraser of Allander Institute (FAI) said the Budget demonstrated a “big rebalancing of Government priorities”, pointing to tax hikes and Reeves’s fiscal rules fudge – which the OBR described as “one of the largest fiscal loosenings of any fiscal event in recent decades”.
Joao Sousa, the institute’s deputy director, said that the FAI believed extra cash would be stumped up to offset the rise in National Insurance contributions for public sector workers.
He said: “For Scotland, there has been a really significant uplift in spending – largely through the Barnett formula due to higher spending in devolved areas.
“Funding for day-to-day spending is £1.5bn higher this year, which is likely to make the Scottish Government’s job of balancing its budget significantly easier.
"Barnett consequentials are £3.4bn next year as well, of which £2.8bn is day-to-day spending.
"The Treasury will also be providing compensation for higher staff costs through the NICs measure for public sector employers – our understanding is that this will be in addition to the £3.4bn announced today."
IPPR Scotland, a progressive think tank, said that "all eyes now turn to the Scottish Budget".
Director Stephen Boyd said: "The additional £3.4bn allocated to Scotland will not resolve all the long-term funding challenges of the Scottish Government, but it could provide a much-needed boost to struggling public services such as health and education."
