‘Jobless rate to rise’ after NI increase

Unemployment will rise thanks to Rachel Reeves increasing employers’ national insurance contributions at the budget, experts have claimed.
The National Institute of Economic and Social Research (NIESR), Britain’s oldest economic think tank, said the employers’ national insurance contributions (NICs) rise, which it characterised as a “tax on jobs”, would push up joblessness and constrain vacancies.
The institute also said the chancellor should have raised income tax for the highest earners and unfrozen income tax thresholds to boost the living standards of the poorest families.
At the budget last month Reeves lifted the main rate of employer NICs by 1.2 percentage points to 15 per cent, starting from next April. She also cut the threshold which determines when employers’ NICs are due to £5,000 from £9,100. Collectively, the changes could raise £26 billion for the government, although experts said that weaker wage growth and job creation may trim the tax yield to about £16 billion.
Professor Stephen Millard, NIESR deputy director for macroeconomic modelling and forecasting, said: “The rise in the employer rate of national insurance contributions will act to reduce job creation over the coming years, which will lead to greater unemployment.”
Lower-income households have been hit hardest by the cost of living crisis due to this group spending a greater share of their earnings on energy and housing costs, which have risen sharply.
The institute said that the chancellor’s decision to keep personal tax thresholds frozen until 2028 would cost the poorest tenth of workers £600 a year in forgone income. “It would be better for the living standards of [poorer] households that have been hit hardest by the shocks over the past few years if the government raised income tax for top earners while unfreezing the thresholds,” Professor Adrian Pabst, deputy director for public policy at the institute, said.
Rachel Reeves lifted taxes by a record £40 billion and raised public investment spending by £30 billion at her inaugural budget. She also increased borrowing by £28 billion a year, which has sparked volatility in UK government bond markets over the past week.
A post-budget auction of UK bonds on Tuesday faltered amid the weakest demand for government debt in almost a year in a sign of investor anxiety over higher borrowing.
Investor appetite was sluggish despite the average yield on offer for the newly issued ten-year bond climbing to 4.475 per cent from 4.17 per cent on the previously issued gilt. A higher yield should attract more investors.
The Debt Management Office, which oversees the Treasury’s borrowing needs, said the total value of bids placed by investors to buy the new 10-year government bond was enough to cover the £3.75 billion on offer 2.81 times over, the lowest ratio since last December.
The institute said it anticipates inflation to tick back up from 1.7 per cent presently to over 3 per cent at the beginning of next year. As a result, although the Bank of England is expected to cut interest rates by 25 basis points at its meeting on Thursday, it is set to adopt a cautious approach to loosening policy, delivering just three more quarter-point cuts in 2025, with rates settling at 3.25 per cent, the institute said.
“A premature loosening in monetary policy” could lead “to a rebound in inflation, particularly if global energy markets become volatile again or if upside risk stemming from geopolitical tensions further materialised”, the NIESR said.
UK economic growth will remain tepid over the coming years, totalling 0.9 per cent in 2024, 1.2 per cent next year and 1.4 per cent in 2026, the researchers predicted. Unemployment will average 4.2 per cent this year before edging lower and then rising steadily in the coming years.