Patrick Nolan

This budget penalises employment

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Supporting jobs and small businesses - "the backbone of future economic growth", in Alistair Darling's words - was seen as a priority in today's Budget. In his statement the Chancellor highlighted the following measures:

•         Extending the young person's guarantee for one year after March 2011 (providing a job, training or work experience for young people who cannot find work).

•         Extending the time to pay scheme, which allows businesses to spread tax payments over a timetable they can afford, for the whole of the next Parliament.

•         Cutting the business rates facing small businesses for one year from October.

These are temporary measures which each deal with relatively minor reasons for unemployment. If the Chancellor was serious about creating jobs in the private sector, he would have found permanent ways to make it easier and less expensive for businesses to take on staff. But instead employees’ and employers’ National Insurance contributions will rise by 1p from next April.

The increase will kill jobs. A key business survey has already shown that 12 percent of employers are expecting to recruit fewer staff in consequence. Along with the freezing of the 40p personal tax threshold, the rise also undermines claims that the extra burden of taxation is only falling on higher income earners. The tax burden on low income earners has ballooned this century. To illustrate, Reform has developed a free tax calculator that people can use to work out how their personal taxes have increased so far this century (and take into account the policies in today's Budget). This calculator shows that, for example, someone earning just above the minimum wage (£5.80 per hour) has faced an increase in national insurance contributions of £1,130, including class 1 contributions levied at the employer level.

This is why Reform has argued that the planned increase in National Insurance contributions be scrapped, and the rates of these taxes should be cut from current levels by half a percent, and the primary threshold (at which employees start paying this tax) should increase to £125 a week (around the level of the personal allowance). These cuts should be funded through higher taxes on consumption.

While supporting jobs and small businesses is a worthwhile goal, the Budget only provides temporary gimmicks. A serious response requires lower taxes on jobs, which the Budget fails to deliver.

Patrick Nolan is chief economist at Reform