Who would pay for Rachel Reeves’s increase in employers’ National Insurance contributions? Well yes, in the first instance it is the companies that would have to hand over the cash, but the real burden would be much more widely shared.
To see why, start with the simple question: what does a company do if it finds its labour costs have suddenly gone up? It can do nothing, in which case its profits fall (or even less agreeably, its losses rise) and it pays a bit less in corporation tax. It can trim its workforce to hold costs down, which will cut the government’s take from income tax, and – of course – from National Insurance. It can increase its prices, in which case customers pay. It can cut or postpone investment, accepting some damage to future growth. It can hold down wages, in which case it is the workers who pay.
Governments have to raise money, and they should do so in a way that does the least damage to the economy
The balance between these different consequences varies enormously from company to company and sector to sector, and it is extraordinarily hard to predict the overall outcome. As you might imagine, there is a sizable industry of economists trying to work out how people react to tax changes, and there is a sub-section devoted to NI. For example, there was a paper by the OBR last February that looked at what happens when the government cuts NI. It examined the ‘income effects’, ‘substitution effects’, ‘participation elasticities’, ‘progression elasticities’, together with ‘separate elasticities for income and substitution effects’. The outcome was that the cuts led to an increase in hours worked equivalent to another 94,000 people in jobs… in 2028/29.
It is easy (and unfair) to mock. So much depends on the mood of the hour – what John Maynard Keynes back in 1936 dubbed ‘animal spirits’, the way emotions drive business and investment decisions. In a time of overall high inflation, a company is more likely to try to pass on higher costs by jacking up prices. If a business is already worried about falling demand, a rise in NI might push it to trim staff numbers now rather than take the risk of having to cut more savagely later.
Right now, the jobs market seems to be softening. The latest ONS stats just out are weaker than expected, and there is the prospect of the government’s reforms to workers’ rights coming into law soon, which may encourage companies to try to trim their workforce as soon as possible. It is quite possible then – though we just don’t know – that most of the impact of higher NI will indeed be on employment, rather than any of the other variables. If that is right, it will be the people who lose their jobs, or fail to find work, that will pay much of the bill. On the other hand, a softening job market may enable companies to hold down pay increases anyway, and the rise in NIs will give them another lever to do so.
The bottom line is this: governments have to raise money, and they should do so in a way that does the least damage to the economy. But pretending that ordinary working people won’t have to pay for an increase in employers’ NI contributions is wrong. Working people, or formerly working people, will stump up.
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