Chancellor previously criticised Rishi Sunak for the same policy in 2022, calling it ‘the worst possible tax rise’
Rachel Reeves has been accused of hypocrisy after it emerged she previously admitted that increasing National Insurance (NI) for employers would hit workers’ pay.
The Chancellor is thought to be planning to increase NI contributions for employers as part of a package of measures designed to raise £40 billion in this month’s Budget.
Ms Reeves and Sir Keir Starmer have repeatedly promised not to increase taxes on working people, a key pledge in Labour’s pre-election manifesto.
Two years ago, Ms Reeves, when she was the shadow chancellor, said a plan by Rishi Sunak, the then-chancellor, to increase employers’ NI contributions was “the worst possible tax rise at the worst possible time” and would affect employees’ pay packets.
Her comments came after a warning from the Office for Budget Responsibility, the Government’s financial watchdog, that 80 per cent of the cost of the increase would be passed on to workers in the form of lower wages.
Ms Reeves is thought to be planning an NI raid as one of several tax rises in the Budget to help raise £40 billion – far more than the £22 billion black hole she claims to have inherited from the Conservatives.
She wants the extra money to prop up the NHS and ensure that no government department has to endure a real-term spending cut this year.
It is understood that most of the £40 billion will be raised through tax rises rather than spending cuts, in what Jeremy Hunt, the shadow chancellor, said would be “one of the most damaging Budgets in history”.
On Tuesday, Sir Keir refused to rule out raising employers’ NI contributions, despite claims that it would break a commitment in Labour’s manifesto not to increase the levy.
When he was chancellor in 2021, Mr Sunak announced an NI increase on employers and employees of 1.25 per cent to pay for social care. The rise was later cancelled.
Ms Reeves told The Telegraph in 2022: “When the Chancellor announced his NICs [National Insurance contributions] rise in September, he and the prime minister argued it was fairer because half would be paid for by employers.
“But this evidence that employees will be hit twice shows just how poorly thought through their tax hike is.
“It is the worst possible tax rise at the worst possible time and will hit businesses and working people across our country at the exact moment prices rise and energy bills for businesses soar.
“To get out of Rishi Sunak’s high-tax, low-growth trap we need to boost British businesses and opportunities for employees – not place yet another burden on them both.”
The Office for Budget Responsibility had concluded that 80 per cent of the increase levied on employers’ contributions would be “passed through to workers via lower nominal wages”.
The remaining 20 per cent rise on companies’ tax bills would have been shouldered by “consumers via higher prices”.
Robert Jenrick, a candidate for the Conservative Party leadership, said: “The Chancellor previously said raising National Insurance on employers is a tax on jobs and will hurt business. Her hypocrisy reeks.
“At a time when we need to go for growth more than ever, this tax rise will be paid for by working people and will derail our economic recovery.”
Writing for The Telegraph, Mr Hunt said: “It appears that the new Labour Government’s first Budget will mean lower growth, lower wages, and fewer jobs – with working people paying the price.
“It’s a bad sign they are abandoning their manifesto promises so quickly. This is shaping up to be one of the most damaging Budgets in memory.”
Helen Miller from the Institute for Fiscal Studies (IFS) said that employer National Insurance contributions were a “tax on the earnings of working people”.
She added: “In the long run, expect the majority of a rise in employer NICs to be passed on to workers in the form of lower wages.”
The £40 billion Ms Reeves now plans to raise is far higher than the £22 billion “black hole” she previously highlighted, which covers an alleged overspend left by the Tories in the current fiscal year.
The extra amount will allow her to avoid cutting public services and to raise a “buffer” of cash if the economy under-performs in future years.
She will need to raise tax revenue or cut spending, including on benefits, to meet a new “golden rule” that balances day-to-day spending with tax revenues.
The scale of the amount she wants to raise indicates that welfare cuts may be much larger than expected.
It is believed, however, that more than half will come from tax rises. Blick Rothenberg, the accounting firm, calculated that £40 billion in extra taxes is the equivalent of raising the basic rate to about 26 per cent – an extra 6p.
The IFS said last week that Ms Reeves would need to raise £25 billion in tax if she wanted to boost spending increases to a rate that was in line with the growth of the overall economy.
One government insider told the Financial Times: “Just to fill the £22 billion black hole that we’ve identified would mean public services just about standing still.”
The amount Ms Reeves wants to raise could be as high as £50 billion.
The Chancellor told The New Statesman that she might need more than the tax rises suggested by the IFS to avoid cuts to government departments’ budgets, because costs such as compensation for victims of the infected blood and Horizon scandals were “in addition” to the £25 billion estimated.
Asked if the gap could be as large as £50 billion, she said: “There’s a big gap and we’ll have to set it all out in the Budget.”
At Tuesday’s Cabinet, the Chancellor reiterated that there would be “difficult decisions on spending, welfare and tax” and – even though she is said to be considering putting up taxes on employers – that the long-term priority is “unlocking private sector investment”. She repeated her pledge to “protect working people”.
She is understood to have told colleagues: “The Budget will be about protecting working people, starting to fix the NHS and rebuilding Britain.
“We cannot turn around 14 years of damage in one Budget, but we can start to deliver on our promise of change.”
One ally of the Chancellor told the FT: “If we are having to raise taxes, we want to put the money into the people’s priorities. The NHS is the number one priority.”
On Tuesday, the International Monetary Fund (IMF) said that Ms Reeves must cut government spending if she wants to reduce debt, saying that relying solely on tax rises is “undesirable”.
The IMF said it would be best if debt was reduced by an equal balance of tax rises and spending cuts.
National debt already stands at 100 per cent of GDP in Britain, and the Chancellor has pledged to get it falling by the end of the Parliament.
Ms Reeves has two self-imposed debt rules, vowing only to borrow to invest and get overall debt falling within five years.
It is widely expected that she will loosen her debt rules to free up more money for infrastructure spending.
The Chancellor has promised no return to austerity, suggesting that fixing public finances will largely be done through higher taxes.
