Is the ‘Budget for working people’ about to bite supermarket shoppers?

As Tesco announces it is facing paying an extra £1bn a year in national insurance, James Moore asks if putting up prices is the only option for supermarkets

Is chancellor Rachel Reeves’s decision to hike employers’ national insurance contributions (NICs) about to hit us all – and right in the supermarket baskets?

According to analysis by investment bank Morgan Stanley, Tesco, the big dog of the UK’s grocery sector, expects to face a £1bn national insurance tax bill over the next four years. The cost of the increases facing Sainsbury’s, Asda and Morrisons adds up to a combined £1.3bn.

And guess who’ll probably end up paying for it all?

Employer NICs are the ultimate stealth tax: from next April, company contributions will increase from 13.8 per cent on wages over £9,100 to 15 per cent, a rise expected to net £23.8bn next year and £25.7bn by 2029-30. The largest revenue-raising measure in the Budget, it will be paid by almost a million businesses – who will mostly pass the pain straight on to their customers.

Reeves chose this as the principal way to close the £22bn black hole in the public finances that she identified because the tax rise won’t immediately appear in the payslips of “working people”. But feel it supermarket shoppers will.

Of course, the supermarkets could try to mitigate the impact. One way would be to lower their input costs by squeezing their suppliers; farmers, and the like. That will inevitably prove controversial, especially with farmers already up in arms over the “tractor tax” which makes agricultural land subject to inheritance tax for the first time. The supermarkets’ suppliers are facing cost pressures, too. So we can probably scratch that.

Option two is to clobber workers: Tesco has 300,000 of them. Supermarket employees have enjoyed some chunky wage rises in recent years because the labour market has been tight and the big players have had to compete hard for the staff they need. That is set to change.

Job vacancies have been falling for more than a year now and while finding people still remains a challenge for employers, the NICs rise is going to have a chilling effect on wages across the board. Settlements will inevitably fall. But not by enough to cover the bill.

This brings us to option three: hike prices. Care to guess which is the easiest for the supermarkets, even in a highly competitive sector like this one?

There is a reason Sainsbury’s boss Simon Roberts recently said the group just didn’t have “the capacity to absorb this level of unexpected cost inflation”. “I don’t think you can shy away from the fact that, because of the changes on everyone’s cost base, it is going to beat through into higher inflation,” he warned.

Despite what Reeves claims, this NICs increase absolutely is a tax on working people. It is deeply dishonest to claim it is anything else, given the effect it will have on their wages and grocery bills.

When it comes to those bills, there is yet another monster lurking under the bed too. One with sharp teeth and a nasty bite. It is the equal pay claims spearheaded by law firm Leigh Day, which all the traditional big four chains are fighting hard. The plaintiffs are mostly female checkout workers, who argue they were underpaid when compared to mostly male warehouse workers for labour that is “of equal value”.

The supermarkets have been clocking up defeat after defeat at the employment tribunal. This could cost billions, and I don’t have much sympathy for the grocers on this front.

Remember, too, that they are profitable businesses; Tesco racked up profits of more than £2.3bn before tax last year. But if supermarkets lose, it’s yet another big number added to their costs, which they will inevitably seek to pass on to keep their shareholders in the style to which they have become accustomed.

Last March, food price inflation hit a peak of 19.2 per cent, according to the Office for National Statistics – the highest annual rate for more than 45 years. It has mercifully fallen back since then but the price of the weekly shop is still rising inexorably. In September, the annual rate of food price inflation ticked up to 1.9 per cent, from 1.3 per cent, the first such increase since March 2023. That is a worrying sign. It looks like it will be the shape of things to come.

I have a lot of time for Paul Johnson, the director of the Institute for Fiscal Studies. But while he may ultimately be proved correct that the Reeves Budget “did little more than apply some sticking plasters and do the minimum required” to keep the wolf from Britain’s fiscal door, he was quite wrong to describe it in The Times as “not a big event at all”.

It was. The NICs increase proves it. Here’s something that should keep Reeves and her colleagues up at night. Inflation played a major role in the election of Donald Trump. Voters hate rising prices. The British government should have a care.