UK Treasury chief admits business tax rise could lead to lower than
anticipated wages
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[November 01, 2024] By
PAN PYLAS
LONDON (AP) — U.K. Treasury chief Rachel Reeves conceded Thursday that
wages may rise by less than previously thought as a direct result of her
budget decision to increase a tax that businesses pay for their
employees.
On Wednesday, Reeves raised taxes by around 40 billion pounds ($52
billion) and announced more government borrowing to plug a hole she
claims to have identified in the public finances, fund cash-starved
public services and invest in an array of infrastructure projects, in a
budget that could set the political tone for years to come.
The biggest single measure — worth some 25 billion pounds in five years
— was an increase in the national insurance contributions employers pay
in addition to the salaries of their workers. The levy, which was
originally designed to pay for benefits and help fund the state-owned
National Health Service but which is really absorbed into the overall
tax take, will also be paid from a lower salary level.
Reeves admitted that the changes may prompt employers to pass on the
additional financial burden by weighing down on wages.
“I recognize there will be consequences,” Reeves told the BBC. “It will
mean that businesses will have to absorb some of this through profit and
it is likely to mean that wage increases might be slightly less than
they otherwise would have been.”
Her admission came as a widely respected British economic think tank
warned that lower than anticipated wages may mean the tax raises more
than thought, adding that Reeves may have to raise taxes again in coming
years in order to support public services.
In its traditional day-after assessment of the budget, the Institute for
Fiscal Studies said some of the projections looked “unrealistic,”
particularly on public spending.
The IFS said the government will potentially need to raise up to another
9 billion pounds the year after next to avoid cutting spending in some
departments.
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Britain's Prime Minister Keir Starmer and Chancellor Rachel Reeves
speak with members of staff, during a visit to University Hospital
Coventry and Warwickshire, in Coventry, England, Thursday, Oct. 31,
2024. (AP Photo/Darren Staples, pool)
Although day-to-day spending is set
to rise rapidly after Wednesday’s Budget, increasing by 4.3% this
year and 2.6% next year, it then slows down to just 1.3% per year
from 2026.
IFS director Paul Johnson said keeping to a 1.3% increase will be
“extremely challenging, to put it mildly.”
There were some visible concerns in the markets that the budget sums
don't add up, and that growth will remain relatively low. On
Thursday, the interest rates charged on U.K. bonds increased, while
the pound was down against most other currencies, including the U.S.
dollar.
“The quiet optimism that appeared to be spreading during Rachel
Reeves’ speech has evaporated and a higher risk premium has returned
for U.K. debt,” said Susannah Streeter, head of money and markets at
stockbrokers Hargreaves Lansdown. “Bond yields are set to stay
volatile, as institutions financing government borrowing keep a more
suspicious eye trained on what the swollen investment budget will be
spent on.”
The center-left Labour party won a landslide election victory July 4
after promising to end years of turmoil and scandal under successive
Conservative governments, get Britain’s economy growing and restore
frayed public services. But the scale of the measures announced on
Wednesday by Reeves exceeded Labour’s cautious general election
campaign.
During the election, Labour said it would not raise taxes on
“working people” — a loose term whose definition has been hotly
debated in the media for weeks. Though Reeves did not increase taxes
on income or sales, the Conservatives said hiking taxes on employers
was a breach of Labour’s election promise and would lead to lower
wages.
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