Six days on from the Budget, and things don’t look any better for Rachel Reeves’s claim that her Budget won’t negatively affect working people. Today and tomorrow, it is the turn of the Commons Treasury Select Committee to pick through the wreckage.
What have we learned so far?
David Miles from the Office for Budget Responsibility (OBR) doubled down on the effect of the rise in employers’ National Insurance (NI). The OBR has already estimated that three-quarters of the effect will be on wages – thereby contradicting Reeves’s claim that working people will not suffer from the rise. Miles went further, saying that many economists would argue that 100 per cent of the effect of higher employers’ NI will eventually be borne by employees. Miles also said the OBR calculates that the rise in NI will cost 50,000 jobs.
Richard Hughes, the OBR’s chair, also revealed that the body had expected bond yields to rise last week – as they did – because it guessed that the extent of the extra borrowing announced in the Budget would surprise markets.
This afternoon it was the turn of economists to give their views on the Budget, including Paul Johnson, the outgoing director of the Institute for Fiscal Studies (IFS). In recent weeks, Johnson has become markedly more outspoken than he has previously been in his 14 years in the job, and he has not come down on the side of the Chancellor. The NI rise, he argued, will give employers a powerful incentive to shift low-paid workers onto self-employment, because of the growing disparity in the bill for NI contributions. It is not so much the 1.2 per cent rise in employers’ NI that is the problem for businesses, he said, as the reduction in the threshold at which employees become liable for their employers to pay NI. This has been reduced from £9,200 a year to £5,000 a year.
That will mean employers having to pay NI on large numbers of part-time workers who previously fell below the threshold. Proportionally, the changes will affect the employment of low-paid workers far more than that of higher-paid workers. It is they who are likely to find themselves shifted onto self-employment. As Johnson pointed out, this rather works against Labour’s efforts to give employees more rights. The practical consequence is that workers are likely to find themselves shifted from zero-hours contracts employment into casual self-employment.
Johnson also had severe words for the rise in stamp duty on second homes and investment properties. ‘My head hit the table,’ he told the committee. ‘You take the worst tax we have and increase it. I find it extraordinary.’ The extra 2 per cent stamp duty on additional properties, he said, will make it prohibitively expensive to buy investment properties, which will impact on the rental market. But if renters are in a position to buy their own homes, they will find stamp duty going up, too, as a result of Reeves’s decision not to extend a reduction in stamp duty for first-time buyers introduced by the Conservatives two years ago.
The IFS has always prided itself on being an independent voice on fiscal matters, and it can hardly be said to have been batting for the Tories in recent years. Indeed, for much of his time leading the think tank, Johnson came across as a little to the left of his predecessor, Robert Chote, who went on to become the first head of the OBR. But as he reaches the end of his term at the IFS, he is certainly not giving Reeves an easy ride. The Chancellor’s own session before the Commons Select Committee, by the way, comes on Wednesday afternoon.
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