Rachel Reeves’ tax hikes pose ‘major threat’ to UK labour market resilience
The government’s tax hikes pose a “major threat” to the health of the labour market, a leading economist has warned, as markets prepare for the latest jobs market figures.
The labour market has been a key source of strength for the UK economy, with continued high employment helping to sustain strong levels of wage growth over the past couple of years.
Many forecasts for 2025 assume that the continued resilience of the labour market will ensure that economic growth accelerates compared to last year.
But economists are worried that measures announced in the government’s maiden Budget will threaten the health of the labour market.
Chancellor Rachel Reeves announced a £25bn increase in employers’ national insurance, lifting the rate to 15 per cent while also cutting the wage threshold at which firms start paying the levy.
Reeves also increased the minimum wage by 6.7 per cent, piling further costs on to employers’ balance sheets.
“Business surveys suggest April’s increases in national insurance contributions and the national living wage pose major threats to this (the labour market’s) resilience,” Andrew Goodwin, chief UK economist at Oxford Economics, said.
The most recent purchasing managers’ index, for example, suggested that employment fell at its fastest pace since the financial crisis in December, excluding the pandemic.
Goodwin said that sectors which employ large numbers of low-paid employees will “disproportionately feel the squeeze from these policy changes”.
“Given these sectors are typically also the most labour-intensive, this raises the risk of significant job losses, potentially pushing up unemployment in 2025,” he said.
But Rob Wood, chief UK economist at Pantheon Macroeconomics, suggested that some business surveys had “exaggerated” the jobs downturn.
“A payroll-tax hike worth less than one per cent of GDP is a much smaller shock than an emerging financial crisis,” he said.
Wood also pointed out that the most recent decision maker panel from the Bank of England showed that hiring intentions actually improved in December.
The comments come ahead of the latest labour market figures, which will be published on Tuesday morning and shed further light on the Budget’s impact on the labour market.
Economists expect the unemployment rate to remain at 4.3 per cent, but predict that quarterly growth in employment will slow to 23,000, down from 173,000 in the previous quarter.
“The rise in employers’ NICs in the Budget may mean jobs growth slows further in the coming months,” Ashley Webb, UK economist at Capital Economics said.
Despite the slowing labour market, economists expect wage growth to rise compared to the previous quarter, largely due to the impact of public sector pay awards.
City experts think regular pay growth will increase to 5.5 per cent, while total pay growth – which includes bonuses – will hit 5.6 per cent, both rising from 5.2 per cent.