The United Kingdom is once again speeding ahead of our Eurozone neighbours in job creation and economic growth. We have wisely removed Covid restrictions, rejected the worst extremes of European policymakers and could be on our way to a roaring recovery. Yet the Government insists on snatching defeat from the jaws of victory with a superfluous tax hike that will damage the economy and lower quality of life.
The national insurance rise, scheduled from April, will put 1.5 per cent on both employer and employee contributions. It will cost the average taxpayer around £270 per year – a serious sum in the context of skyrocketing energy prices and rising inflation on food and other essentials. The NIC raid will hit poorer workers especially hard, while leaving pension and property income unscathed.
Perhaps more worryingly, the employer NIC increase is a direct tax on businesses’ hiring. Pushing up their operational costs will mean higher prices for consumers and lower wages for workers. It could even feed a dreaded ‘wage price spiral’ that pushes inflation out of control.
For all the pain, the increase is expected to raise £12 billion a year. For the first two years this cash will largely be used to address health backlogs and then for social care reform; presuming the NHS will actually surrender the additional money and it won’t simply be absorbed by higher ongoing operating and wage costs. It was always strange to suggest that taxes needed to rise to address the NHS backlog. It could have been dealt with like the rest of the Covid spending from the last few years: a once-off addition to the debt, or else by cutting spending elsewhere or recuperating some of the billions lost to Covid fraud.
In any case, the public finances have fared better than expected due to stronger economic growth. The Government has borrowed nearly £13 billion less and tax revenues are £18 billion higher than forecast between April and December 2021. This ‘growth dividend’ would more than cover the cost of pausing the national insurance hike for at least 12 months.
This speaks to a deeper truth: economic growth is the most effective way to boost tax revenues to spend on services, lower taxes for citizens and reduce national debt to GDP. ‘Treasury Brain’, which seems to have infected Chancellor Rishi Sunak, assumes the books can only be balanced by increasing the tax burden. But higher taxes reduce economic activity which means less tax revenue and more debt.
Embarrassingly for Boris Johnson, Labour is now making precisely this point. “The tax burden is the highest for 70 years,” said shadow chancellor Rachel Reeves on Friday. “They’ve become a high tax party because they’ve become a low growth party.”
We hear a disturbing amount nowadays about how the government intends to spend our money and very little about cuts or policies to boost the economy and make us richer. It should not take a political crisis for a Tory PM to consider not increasing taxes.
It’s unlikely that Labour’s big-government policies would produce substantially more growth than the Tories’ similar vision. Nevertheless, the opposition’s positioning on tax highlights an electoral weakness for the government. People vote Conservative expecting to keep a little more of what they earn. If the Tories are going to break a core manifesto pledge and do the opposite, why not just vote for the other guy?
Matthew Lesh is Head of Public Policy at the Institute of Economic Affairs
