A new budget introduces a rise in National Insurance Contributions (NICs) that experts describe as a ‘tax on jobs’.
- The National Institute of Economic and Social Research (NIESR) suggests the increase will hinder job creation and slow vacancy growth.
- Economists predict that new tax measures will primarily strain lower-income households due to high inflation and frozen tax thresholds.
- Volatility is anticipated in the UK bond market, alongside cautious interest rate cuts by the Bank of England.
- Employment growth is expected to struggle, with unemployment likely to rise over the coming years.
The recent budget sees employer National Insurance Contributions rise by 1.2 percentage points, bringing them to a total of 15%. This change, described as a ‘tax on jobs’ by the National Institute of Economic and Social Research (NIESR), is anticipated to slow job creation and impede growth in job vacancies. The initiative is projected to generate £26 billion for the government, though economists warn this could diminish to £16 billion due to reduced wage growth and job opportunities.
Stephen Millard, NIESR’s deputy director for macroeconomic modelling and forecasting, highlights that this adjustment in NICs is expected to contribute to an increase in joblessness over the years ahead. Lower-income households are projected to feel the most significant impact, with inflation and the freezing of tax thresholds posing additional financial burdens. Adrian Pabst, another deputy director at NIESR, advocates for a shift towards higher income tax for top earners rather than freezing personal tax thresholds, as a means of bolstering the living standards of those on lower incomes.
In the financial markets, the UK’s decision to increase borrowing by £28 billion each year has already induced volatility within the bond market. The latest 10-year government bond auction revealed its weakest demand in nearly twelve months, with a higher yield of 4.475% failing to entice investors and reflecting broader concerns about rising government debt levels.
The economic landscape is compounded by predictions of inflation rising to over 3% early next year. This scenario is likely to prompt the Bank of England to tread carefully with interest rate reductions, with an anticipated 0.25% cut forthcoming. The Bank is expected to carry out further quarter-point cuts throughout 2025, aiming to stabilise interest rates at approximately 3.25%.
NIESR projects minimal economic growth in the UK, estimating an increase of just 0.9% in 2024. This rate is expected to rise slightly to 1.2% in 2025 and 1.4% in 2026. Concurrently, the unemployment rate, presently averaging 4.2%, may experience a brief decrease before rising steadily, reflecting ongoing economic challenges.
The increase in National Insurance Contributions poses significant challenges to job creation and economic growth, with unemployment expected to rise.
