Experts from the National Institute of Economic and Social Research (NIESR) have cautioned that the recent increase in employers’ national insurance contributions (NICs), announced in Chancellor Rachel Reeves’ budget, will likely lead to higher unemployment.
NIESR has described the NICs increase as a “tax on jobs,” warning that it will curb job creation and slow vacancy growth.
The budget, which raised employer NICs by 1.2 percentage points to 15% and lowered the threshold for employer NICs liability to £5,000, is expected to generate £26 billion for the government. However, economists suggest that reduced wage growth and job opportunities could cut the anticipated tax yield to around £16 billion.
Stephen Millard, NIESR’s deputy director for macroeconomic modelling and forecasting, highlighted that the NICs hike would “reduce job creation,” contributing to rising joblessness over the next few years. Lower-income households are expected to feel the greatest strain, as inflation remains high and tax threshold freezes impact their disposable income. Adrian Pabst, NIESR’s deputy director for public policy, suggested 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, with the latest 10-year government bond auction seeing its weakest demand in nearly a year. Despite a higher yield of 4.475%, investors showed limited interest, reflecting anxiety over rising government debt levels.
NIESR predicts 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.
