Rachel Reeves has begun laying the groundwork for a tax raid on jobs after public sector pay rises drove a surge in borrowing.
The Chancellor told The Telegraph she was “shocked” by the state of the public finances after official figures showed the Government had borrowed almost £5bn more than forecast in the first four months of the financial year. Ms Reeves said she would take “the difficult decisions necessary to get Britain’s finances back on track”.
Her comment came as Darren Jones, the chief secretary to the Treasury, opened the door to an increase to employers’ National Insurance contributions, the tax paid by bosses on their workers’ salaries.
“We will have to consider some tax measures at the Budget on October 30 whilst honouring that promise to the public not to increase income tax, employee National Insurance or VAT,” Mr Jones told Times Radio.
Mr Jones’s choice of words represents a softening of the Chancellor’s pledge last month to “not increase National Insurance”, without caveats. It raises the prospect that a raid on bosses could be on the table.
National Insurance is made up of a tax on employees and another on employers, which combined raked in almost £180bn for the Government last year. The headline rate of employer contributions is 13.8pc on staff earnings.
Business leaders raised alarm about the prospect of an increase in this “jobs tax”, saying it would lead to lower wages and would hurt growth.
Neil Carberry, chief executive of the Recruitment and Employment Confederation, said: “Higher employers’ NI increases the cost of employment, a change which either reduces firms’ ability to hire, or leads to costs being passed on in the form of lower wage awards.
“Too often, politicians see it as an ‘easy’ tax rise, but it contributes to a whole range of longer term issues.”
Tina McKenzie, policy chair at the Federation of Small Businesses, said increasing the tax would break the manifesto pledges on which Labour was elected.
She said: “Labour made a cast-iron manifesto commitment not to increase National Insurance contributions, including on small employers. Taxes on employers must be cut, not raised.”
A Conservative Party spokesman said any increase would be “blatantly dishonest” following Labour’s manifesto pledges and said a higher rate “would increase the cost to businesses of employing someone, leading to lower wages and higher unemployment”.
Fears of the looming tax raid came after figures from the Office for National Statistics (ONS) showed the Government borrowed £3.1bn in July, well above the £0.1bn anticipated by the Office for Budget Responsibility (OBR).