Chancellor Rachel Reeves’ increase in National Insurance on employers may push up prices, cut jobs and squeeze pay rises, says the governor of the Bank of England.
Andrew Bailey gave the grim analsysis just hours after the bank’s Monetary Policy Committee cut interest rates by a quarter point to 4.75%.
He also said rates should fall “gradually”, saying the Bank should not cut “too quickly or by too much”, dampening bets of another reduction in December.
Appearing on Andrew Marr’s show on LBC Radio, he stressed that the UK economy was now in a “more settled place” after the shocks from the Covid pandemic and Vladimir Putin’s invasion of Ukraine.
Asked about the NI rise on employers of £25 billion in the Budget, he said: “Now the change to National Insurance contributions does put up the cost of employment, that’s clear.
“So, it could lead to increased prices and could lead to inflation, but it could also lead to, and I think the Chancellor said this, it could lead to wage increases being lower than they would have been, it could lead to a squeeze on profit margins.
“It could lead to employment being lower as firms seek to manage their costs down, and it could lead to firms increasing their productivity.”
Millions of homeowners may also see their mortgage bills rise after the Budget, as they are likely to be pushed up by higher interest rates, says the independent Office for Budget Responsibility.
Ms Reeves has defended her £40 billion of tax rises in the Budget, and £32 billion extra borrowing, to spend some additional £70 billion on fixing Britain’s crumbling public services, including more than £22 billion more for the NHS, and to improve the nation’s transport and other infrastructure.
However, the Labour’s government aim to boost economic growth appears challenging.
The OBR forecast GDP growth to be 1.1% in 2024, 2.0% in 2025, 1.8% in 2026, 1.5% in 2027, 1.5% in 2028 and 1.6% in 2029.
Mr Bailey also issued a warning on the potentially devastating impact of incoming US president Donald Trump imposing hefty tariffs on imports into America.
‘What I would call fragmentation of the world economy, the world economy sort of breaking up is not a good thing, it’s a bad thing,” he said.
“Tariffs is one of the things that can cause that sort of fracturing of the world economy… Open trade really stimulates growth.”
The new Labour government is warning against a “trade war”, insisting it wants to keep open trade given the type of economy in the UK and is not currently threatening to retaliate to any US tariffs with UK ones.
