The Impact of Increased National Insurance Contributions on the UK Economy
The National Institute of Economic and Social Research (NIESR) has expressed concerns that the recent increase in employers' national insurance contributions (NICs), announced in Chancellor Rachel Reeves' budget, could lead to higher unemployment.
NIESR describes the NICs increase as a "tax on jobs," arguing that it will discourage job creation and slow vacancy growth. While the budget aims to generate £26 billion for the government by raising employer NICs by 1.2 percentage points to 15% and lowering the threshold for employer NICs liability to £5,000, economists suggest that the actual tax yield could be closer to £16 billion due to reduced wage growth and job opportunities.
Stephen Millard, NIESR's deputy director for macroeconomic modelling and forecasting, highlights that the NICs hike will "reduce job creation," contributing to rising joblessness over the next few years. Lower-income households are expected to be most affected, as inflation remains high and tax threshold freezes impact their disposable income. Adrian Pabst, NIESR's deputy director for public policy, suggests that raising income tax for top earners rather than freezing personal tax thresholds would better support the living standards of lower-income families.
The budget's tax changes and increased borrowing by £28 billion annually have triggered volatility in the UK bond market. The latest 10-year government bond auction saw its weakest demand in nearly a year, despite a higher yield of 4.475%. This reflects investor anxiety over rising government debt levels.
NIESR predicts that inflation will rise to over 3% early next year, leading the Bank of England to take a cautious stance on rate cuts, with a predicted 0.25% reduction at its upcoming meeting. The Bank is anticipated to implement a few quarter-point cuts through 2025, with interest rates stabilising at around 3.25%.
As inflation and economic uncertainty continue to weigh on UK growth, the think tank projects minimal growth of 0.9% in 2024, increasing slightly to 1.2% in 2025 and 1.4% in 2026. Unemployment, currently averaging 4.2%, is expected to edge lower before rising steadily over the coming years, reflecting the challenging economic landscape.