The budget is likely to mean smaller pay rises for workers because of the impact on businesses, Rachel Reeves has conceded.
The chancellor said she recognised “there will be consequences” to her first budget, which includes £40bn in tax rises, more than half of which come from increasing tax on businesses.
At the heart of the budget is an increase in employers’ national insurance contributions (NICs) projected to raise £25bn by the end of this parliament.
Companies said the measures would make it more expensive for them to hire people and give pay rises, and therefore risked affecting economic growth.
“I recognise there will be consequences,” Reeves told BBC Breakfast. “It will mean that businesses will have to absorb some of this through profit and it is likely to mean that wage increases might be slightly less than they otherwise would have been.”
The Office of Budget Responsibility (OBR), which provides independent fiscal oversight, said it assumed companies would “pass on most but not all of their higher tax costs to employees”. In 2025-26, according to its estimates, 60% of these costs will be passed on to workers and consumers via lower wages and higher prices.
But the International Monetary Fund endorsed the investment and spending on public services in the budget, as well as sustainable tax rises. In an unusual move, the Washington-based watchdog said: “We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue.”
Reeves said the decision to raise businesses’ NICs was “a difficult one”, adding: “I’ve tried to protect the smallest businesses from its impact, but the alternative would have been pretending that the pressures on the public finances didn’t exist.”
She added: “I had to make difficult decisions about how to raise the money that is needed. I decided that the right thing to do was to ask businesses and the wealthiest in our country to pay a bit more. They weren’t easy choices. I do recognise that they will have consequences.”
But Reeves stressed that because “overall the OBR forecasts that household incomes will increase during this parliament, that is a world away from the last parliament – which was the worst parliament ever for living standards”.
But Jeremy Hunt, the shadow chancellor, said raising taxes was a “conscious choice” that would leave the public feeling betrayed.
The chancellor insisted that this budget – which includes the biggest increase in taxes since 1993 – was a one-off and would avoid the need for more tax rises in future years. She argued that the alternative would have been “having to come back next year and ask for more tax rises, and I wanted to do this all at once so we could wipe the slate clean”.
Reeves told Times Radio: “I had to make big choices. I don’t want to repeat a budget like this ever again, but it was necessary to get our public finances and our public services on a stable trajectory.”
Smaller businesses will be shielded by the doubling of the employment allowance from £5,000 to £10,500, which allows them to reduce their national insurance bill. Reeves said 1m small businesses would pay either less or the same in NICs.
In 2021, while Labour was in opposition, Reeves called a rise in employers’ NICs a “jobs tax” that “takes money out of people’s pockets”. Asked on the BBC Radio 4 Today programme whether she was right, the chancellor said: “What alternative was there?”
Hunt told ITV’s Good Morning Britain: “Let’s make the most important point: even if this £22bn black hole needed fixing, Rachel Reeves did not put up taxes by £22bn – she put up taxes by £40bn.
“This was not about legacy, this was about a conscious choice, and if she was committed to do that she should have told us before the election. I think many people this morning will wake up feeling betrayed.”
Hunt said he would step down as shadow chancellor once the new Conservative leader was elected this weekend.
