IFS Criticism of Potential NICs Increase in Budget

Keir Starmer, the leader of the Labour Party, received a warning today regarding potential changes to employers' national insurance contributions (NICs) in the upcoming Budget. The head of the Institute for Fiscal Studies (IFS) indicated that such a move would be a 'straightforward breach' of Labour's manifesto commitments.

Paul Johnson, the head of the IFS, emphasized that the manifesto was clear on the matter, as concerns grow about Chancellor Rachel Reeves' proposed financial measures.

Some ministers have been suggesting that only the NICs paid by employees are covered by Labour’s pledge, which could set the stage for either an increase in personal NICs or the introduction of levies on employers' pension contributions.

A recent report from the Resolution Foundation estimated that Rachel Reeves would need to secure an additional £20 billion to £30 billion in revenues for the fiscal package set to be unveiled on October 30.

During a global investment summit held in London, Reeves stressed the importance of financial discipline alongside investment in infrastructure. She stated, "Discipline on spending, alongside investment in capital, is essential."

Reeves also assured business leaders that the government would establish a tax system that encourages wealth creation and boosts business investment. In her address, she remarked, "I know that providing certainty is right at the heart of that," referring to the previous instability caused by frequent changes in corporation tax.

To provide stability, Reeves pledged to cap the corporation tax rate at 25 percent, the lowest in the G7 for the current parliamentary term. Additionally, she mentioned maintaining generous capital allowances to foster business growth.

Despite these assurances, businesses have voiced concerns that increasing national insurance contributions and capital gains tax could result in a 'tax on jobs'.

In an interview, IFS director Paul Johnson reiterated that altering national insurance for employers would violate Labour’s manifesto, which clearly states they will not raise NICs without specifying employee contributions. He noted that applying NICs to employers' pension contributions could lead to substantial revenue for the Treasury yet position a burden on retirement funds and reduce overall investment.

Sir Keir also received feedback from former Google CEO Eric Schmidt during the summit, who warned that the UK’s business environment is hampered by negative sentiments and that delays could prove detrimental to progress.

Charlie Nunn, the CEO of Lloyds Banking Group, similarly cautioned Labour against implementing stricter pension regulations or capping contributions, emphasizing the need to improve pension coverage within the UK.

According to the Resolution Foundation's report, the anticipated £19 billion 'black hole' in public finances cited by Reeves may persist due to continued overspending on areas such as public sector pay and asylum costs, exacerbating fiscal pressures.

Senior economist Cara Pacitti articulated the challenges facing the Chancellor, pointing out that the government’s commitment to avoid returning to austerity and promises to uphold public investments strongly suggest that tax increases in the Budget are almost unavoidable.

The last administration's spending plans included a £20 billion reduction for so-called 'unprotected' departments, including police and local governments. Pacitti warned that without increasing taxes, fulfilling these commitments would necessitate breaking the government's promise to balance everyday spending with tax revenues.

She concluded that raising between £20 billion and £30 billion in taxes would likely be required to create an adequate buffer against financial obligations.

Overall, the IFS has suggested reviewing capital gains tax, inheritance tax, and NICs from employers as potential avenues to generate the necessary funds, though any adjustment to NICs would conflict with Labour's manifesto pledge.

Budget, NICs, Tax