Now the reality for ‘working people’ becomes painfully clear

Editorial: After a Budget that garnered little more than lukewarm praise, a pressing concern for the Labour government is how little extra growth in living standards there will be in the coming years. The 2020s may yet go down as a doomed decade

After weeks when Rachel Reeves stoutly held the line that her Budget changes wouldn’t affect “working people”, she suddenly cracked on BBC Breakfast News and conceded the point.

Like any failure of structural integrity in a previously assumed unassailable facade, the causes for this unexpected concession are not immediately obvious. The question posed about the practical effect on “working people” of the increase in employers’ national insurance contributions (NICs) was entirely routine, and must have been batted away by the chancellor hundreds of times, going back to before the general election.

The Labour manifesto, after all, had been guilefully worded to appear to rule it out, without actually doing so explicitly; and Sir Keir Starmer managed to dodge the accusation at Prime Minister’s Questions a few weeks ago when Rishi Sunak focussed on the “tax on jobs” directly. Yet now, in political extra time, Ms Reeves has conceded a rather soft goal.

Perhaps Ms Reeves, more economically literate than most of her predecessors in No 11, could simply bear the intellectual incoherence no longer. At any rate, the chancellor agreed that the rise in employers’ NICs would indeed affect the pay of “working people”.

"It will mean that businesses will have to absorb some of this through profits and it is likely to mean that wage increases might be slightly less than they otherwise would have been.”

So, in other words, for all practical purposes, Labour has indeed breached its manifesto promise about protecting working people, as was always obvious to anyone with the slightest acquaintance with business and applied economics. As James Smith of the Resolution Foundation, and many other experts, pointed out: “Even if it doesn’t show up in pay packets from day one, it will eventually feed through to lower wages. This is definitely a tax on working people, let’s be very clear about that."

Ms Reeves could certainly not win the argument with the government’s own designated watchdog, the Office for Budget Responsibility, which has determined that, by 2026-27, some 76 per cent of the total cost of the NICs increase will be passed on through a squeeze on pay rises and increased prices.

She may also find that lowering the threshold will drag many more low-paid and part-time workers into a position where their employers are faced with an immediate new charge, simply for continuing to employ them – on top of the substantial increases in the national minimum wage and any expenses incurred through the new laws on workers’ rights.

Although there will be an NICs rebate for smaller firms, the impact on the hospitality sector, already short of labour and having to pay higher wages, could be especially grievous.

What’s more, the Institute for Fiscal Studies points out that Ms Reeves won’t raise the £25bn she plans to from the changes to NICs. This is because the changes will lower wages, reducing the amounts raised from employer NICs, employee NICs and income tax. That takes the net revenue down to some £16bn. In addition, to deal with the oddity of the government inflating its own public sector wages bill, there will be another effective £6bn of compensation for public sector employers.

This is not quite “omnishambles” territory. Ms Reeves stayed well clear of trying to amend the VAT liable on “ambient” foodstuffs, such as Cornish pasties – but her Budget is showing signs of untidiness.

Farmers are already expressing great distress at the prospect of having to break up family landholdings to pay increased inheritance tax; and the 50 per cent increase in the bus fare cap is also proving to be a hated new impost.

Ms Reeves is even getting little thanks for the continuing “temporary” freeze on fuel duty, her face being given the Halloween pumpkin treatment in Rupert Murdoch’s Sun. At least it wasn’t a turnip.

But the greater worry is how little extra growth in living standards there will be in the coming years. The 2020s seem like they will go down as a doomed decade indeed.

The greatest irony about increasing national insurance is that it’s the one tax that is, by definition, paid exclusively by almost all “working people”, directly or indirectly, self-employed or employed. Unlike income tax, it is not paid by those who’ve retired, for example, nor the idle rich. Some workers pay fuel duty, others don’t. VAT is impossible to avoid – but doesn’t show up on people’s payslips, to use Sir Keir’s latest criterion. Not all workers will pay tobacco duty, or be liable for capital gains tax. But they are all affected by national insurance, in any of its incarnations.

Now that Ms Reeves has, at last, confessed that, what else is she going to admit to?