IFS Warns Against National Insurance Changes in Budget

The head of the Institute for Fiscal Studies (IFS) has issued a strong warning to Labour leader Keir Starmer regarding proposed changes to employers' national insurance contributions (NICs) in the upcoming Budget. He stated that such moves would represent a 'straightforward breach' of the Labour manifesto.

Paul Johnson, the head of IFS, emphasized that the Labour manifesto was explicit about not increasing NIC rates, stating the document is "clear" amid growing concerns about Chancellor Rachel Reeves' plans.

Some ministers have been suggesting that only NICs paid by employees are protected under the manifesto's promise, hinting that there could be increases or new levies imposed on employers, possibly including pension contributions.

In a newly released report, the Resolution Foundation estimates that Rachel Reeves will need to secure an additional £20 billion to £30 billion in her fiscal package set to be announced on October 30.

During a speech at a global investment summit in London, Ms. Reeves remarked, "Discipline on spending, alongside investment in capital, is essential." This indicates a careful approach toward balancing investments with fiscal responsibility.

While Sir Keir Starmer seeks to reassure the public and business leaders regarding potential hikes in capital gains tax (CGT), concerns remain. The Prime Minister downplayed speculation about raising CGT to a hefty 39 percent, calling such claims "wide of the mark."

Challenges Ahead for Labour

Keir Starmer aimed to convey a positive outlook while addressing business leaders at the Guildhall event. He acknowledged the importance of establishing a reliable tax system that fosters investment and wealth creation.

During her address, Ms. Reeves reaffirmed the government's commitment to creating a stable corporate tax environment. She stated, "We will cap the rate of corporation tax at 25 percent, the lowest in the G7, for the duration of this Parliament." Additionally, she promised to maintain generous investment incentives designed to stimulate growth and innovation.

However, anxiety persists among businesses that increasing NICs and capital gains taxes would act as a deterrent to job creation. Paul Johnson reiterated the IFS viewpoint on Times Radio, stressing that raising employer NICs would contradict Labour’s pledge. He noted, "The manifesto clearly states we will not raise rates of national insurance. It does not specify employee NICs exclusively."

Impact on Pensions and Investments

There are growing fears surrounding the potential effects of NIC changes on employer pension contributions. Implementing fees on such contributions could generate significant funds for the Treasury—up to £17 billion—but might also weaken retirement savings and hinder investment opportunities.

During an event, former Google chief Eric Schmidt warned that the UK is plagued by negativity, stating, "The delay is killing you." This reflects increasing frustration with the current economic climate.

Lloyds Banking Group CEO Charlie Nunn emphasized the need for careful handling of pension regulations, expressing concern over potential restrictions on pension contributions. He stated, "Pensions are critical, and we need to focus on increasing enrollment and investments in pensions to ensure a secure future for individuals."

Additionally, the Resolution Foundation's report indicates a persistent 'black hole' in public finances of around £19 billion, which may not improve. It warned that overspending in specific areas could accumulate over time, increasing pressures on the financial landscape.

Senior economist Cara Pacitti pointed out that the government's commitments avoid reverting to austerity while needing to balance rules regarding debt and borrowing. She noted that tax increases are likely necessary, estimating an increase of between £20 billion and £30 billion in taxes to achieve a target of ‘headroom’ in the budget.

Amidst these challenges, the Resolution Foundation has suggested reforming capital gains tax, inheritance tax, and employer NICs as potential solutions for raising needed revenues. However, changes to NICs would be viewed as a violation of Labour's promise to not raise national insurance rates.

Labour, Budget, NICs