RACHEL Reeves yesterday admitted her bombshell Budget will squeeze the wages of millions of working people.
The Chancellor told MPs on Wednesday that she had protected workers by freezing direct taxes on their pay.
But economists warned that most of her £25 billion raid on employer National Insurance would be passed on to workers through lower wages.
The Office for Budget Responsibility (OBR) forecast that average real household disposable income would be around £300 lower per person per year as a direct result of the Budget.
The economic watchdog predicted that by 2026/27, 76 per cent of the total cost of the NI hike will have been passed on through lower real wages – a combination of a squeeze on pay rises and increased prices.
Chancellor Rachel Reeves told MPs on Wednesday that she had protected workers by freezing direct taxes on their pay
Economists warned that most of her £25 billion raid on employer National Insurance would be passed on to workers through lower wages.
Ms Reeves yesterday conceded that workers would be hit by the knock-on impact of her Budget, which will raise taxes by £40 billion a year. She urged firms to accept reduced profits rather than squeezing staff wages. She insisted: ‘I said that it will have consequences. It will mean businesses will have to absorb some of this through profits and it is likely to mean that wage increases might be slightly less than they otherwise would have been.’
In opposition, Ms Reeves described employer NI as a ‘jobs tax’. Yesterday she acknowledged it would ‘have an impact on wage growth, but insisted it was less damaging to hard-pressed workers than an equivalent rise in income tax. ‘Look, what alternative was there?’ she told the BBC. ‘We had a £22 billion black hole in the public finances.’ The Chancellor insisted ministers had ‘protected the smallest businesses’ from the tax hike and had stood firm on its promise not to raise the key taxes on working people – income tax, national insurance and VAT.
But the centre-Left Resolution Foundation warned that Britain faced a ‘prolonged pay downturn’. The think-tank said real pay is set to ‘stagnate’ in the middle of this Parliament. It found that by 2028 real wages are likely to have grown by just £13 a week over the previous 20 years. Its research director James Smith said of the NI rise: ‘This is definitely a tax on working people. Even if it doesn’t show up in pay packets from day one, it will eventually feed through to lower wages.’
The Conservatives said the tax bomb equated to ‘a total tax bill of over £9,700 per working household over the next five years’.
In a jibe at Labour, the party said it was referring itself to the UK Statistics Agency for warning in the election that Ms Reeves was planning a raid equal to £2,094 – a claim Sir Keir Starmer described at the time as ‘a lie’.
Shadow Chancellor Jeremy Hunt said the Budget amounted to ‘the biggest-ever assault on our economic competitiveness’. He said Ms Reeves had angered many who felt she had not lived up to the spirit of Labour’s manifesto promises not to increase taxes for working people, adding: ‘Many people thought this was a new Labour prospectus, not a traditional tax-and-spend prospectus, and they have woken up to a Chancellor who has given us the biggest tax-raising Budget in history.
‘However much Labour tries to say their tax rises won’t hurt ordinary families, the OBR and the Institute for Fiscal Studies say it’s going to mean lower pay, lower living standards, higher inflation, higher mortgages.’