Why Chancellor Rachel Reeves opted for the ‘jobs tax’ in the Budget
The government has frantically been searching for a story to tell on the economy since the turn of the year, after the Budget was so poorly received by both businesses and households.
Rachel Reeves is currently busy trying to cast herself as a deregulatory Chancellor, which has received a cautious welcome from business groups.
But the fact remains that businesses are still feeling frustrated – perhaps even slightly betrayed – by the tax raid which was, after all, very much targeted at businesses.
The problem for the government is that there is a story to tell about the tax hike and its intended impact on the economy, it is just one that the Chancellor herself cannot tell.
While it is true that the Budget went down like a cup of cold sick with businesses, one should remember that ‘business’ is not a monolithic bloc.
The measures which will come into force later this year – the national insurance increase, the minimum wage hike and the employment rights package – disproportionately impact labour-intensive industries, such as hospitality.
Of course, this has been noticed already. Multiple business owners and industry groups have warned about the potential impact on their sector.
Following the Budget, over 200 of the UK’s biggest hospitality businesses warned that the tax hikes could lead to job losses and force some firms into liquidation.
Hospitality employs around 10 per cent of people in the UK, making it the third largest employer in the private sector.
What has been less noticed is that these measures can be seen as part of a wider ambition – perhaps even strategy – to move people out of jobs in those sectors, and ideally find them new jobs in more productive and higher paying sectors.
To understand this logic, just look at Resolution Foundation’s Ending Stagnation report, a document published by the think tank in 2023 laying out a new economic strategy for the UK.
“It is easy to point at sectors it would be nice to grow, but a serious strategy must also wrestle with what should not expand,” it says, slightly ominously.
It goes on: “Hospitality, accounting for over 60 per cent of employment growth across lower-paying sectors since 2008, is a crucial employer, not to mention source of significant pleasure. Its size reflects in part a set of choices. The proportion of total consumption that hospitality represents is higher in the UK than anywhere else in Europe. Why? Because it is relatively cheap”.
“Improving pay and conditions for workers in this and other lower productivity sectors will over time change that. This is a feature, not a bug, of how improved labour market conditions can make Britain a fairer country.”
The Resolution Foundation is not the government, so there is not a direct read across to the way the government thinks.
But still, it is an influential left-leaning think tank and it is reasonable to think that Treasury officials have similar hopes in mind (particularly because Torsten Bell, the Foundation’s former chief executive, is now a Treasury minister).
To put it more bluntly than Reeves ever could, the theory is that the hospitality sector does not need to be as big as it is.
It is good at giving jobs to people who might otherwise be outside of the labour market, but it would be better still if more people were employed in more secure and more productive jobs, earning higher wages to boot.
“The national insurance rise, minimum wage increase and employment rights bill suggest the government is prioritising getting more people into higher quality jobs rather than just seeking to increase employment at all costs in the short run,” Aveek Bhattacharya, research director at the Social Market Foundation said.
This will mean prices are higher in the hospitality sector. But, as the Foundation noted, this would largely be paid for by wealthier households.
Firms may even be encouraged to invest in capital instead, if the cost of labour went up, which would improve productivity. There’s some evidence this has been happening already, with Whitbread talking about introducing robot hoovers in the wake of the Budget.
If you take this argument seriously, the most important question is what happens to the people who were previously employed in low-skilled hospitality jobs.
There is an obvious and attractive answer: Retrain them to fill jobs in some of the sectors where there are labour shortages, most notably construction.
Industry figures agree that labour shortages are a meaningful constraint on both the government’s housebuilding target and its environmental ambitions.
But workers do not magically find their way into different jobs, particularly if they require different skills. Bhattacharya said it was a “gamble” for the government, albeit an “understandable” one.
The real question then is whether the government has a serious plan to cushion the blow of the ‘jobs tax’ (potentially a column for another time).