Chancellor Rachel Reeves delivered a controversial budget on Wednesday, October 30th, 2024, that significantly increases taxes on British businesses. While aiming to avoid raising taxes on “working people,” as promised in the Labour manifesto, the budget’s centerpiece – a substantial hike in National Insurance contributions for employers – has sparked widespread criticism from business leaders and analysts. Concerns center around the potential for slower hiring, reduced wage growth, increased inflation, and ultimately, a dampening effect on economic growth, despite short-term gains predicted by the Office for Budget Responsibility (OBR).
Key Takeaways: UK Budget 2024
- Significant National Insurance Hike: Employers face a 1.2 percentage point increase in National Insurance (NI) contributions, pushing the rate to 15% from April 2025. This is expected to generate £25 billion annually.
- Lower NI Threshold: The NI threshold at which employers start paying contributions has been *reduced* from £9,100 to £5,000.
- Minimum Wage Increase: A substantial rise in the minimum wage impacts employment costs for businesses further.
- Business Opposition: Business groups and the Conservative party strongly oppose the measures, arguing they will ultimately harm employees and hinder economic growth. They see the chancellor’s claims about protecting working people as a **false dichotomy**.
- Inflationary Pressure: The OBR and analysts at major investment banks, like Morgan Stanley and Goldman Sachs, predict that the tax increases will likely contribute to higher inflation and potentially slow the pace of interest rate cuts by the Bank of England.
‘A Tough Budget for Business’
The budget’s most significant impact comes from the substantial increase in National Insurance contributions for employers. This 1.2 percentage point rise will significantly impact businesses’ bottom lines. While the government claims this measure allows them to avoid raising taxes on “working people,” critics argue this is a misleading simplification. The Institute of Directors’ Roger Barker called it a **”major blow”** and highlighted the inevitable impact on wages and employment. **”This is a false dichotomy,”** Barker stated, explaining that added NI costs will initially reduce company profits before being passed on through lower wages or reduced hiring.
Impact on Small and Medium-Sized Enterprises (SMEs)
The government attempted to mitigate the impact on small businesses by increasing the employment allowance to £10,500. Reeves argued this would enable firms to employ up to four minimum wage workers full-time without paying employer NI. However, industry figures such as Andrew Martin, the CEO of SMEB, a payments platform for SMEs, expressed reservations. Martin argues that it will add another significant cost to SMEs already facing financial difficulties; many, in his opinion, will still feel the brunt of the increased NI costs. The measure, while intending to offer relief, is likely insufficient for the majority of the UK’s 5.5 million SMEs.
Minimum Wage Increase Adds to Burden
Further exacerbating the difficulties, the budget also included a significant increase in the UK’s minimum hourly wage. The minimum hourly pay for over-21s rose by 6.7% to £12.21 while the increase for 18 to 20-year-olds was a sharp 16% to £10. These increases, when combined with the NI hikes, produce a more significant challenge to many businesses’ ability to remain profitable and maintain employment. Rain Newton-Smith, chief executive of the Confederation of British Industry (CBI), succinctly summed up the business community’s reaction, calling it **”a tough budget for business.”**
Economic Impact: Growth vs. Inflation
The OBR, while politically independent, projected near-term economic growth, but also cautiously warned about the inflationary pressures stemming from the tax increases. The forecast anticipates that businesses may pass on the increased costs to consumers by increasing the prices of their goods and services. This prediction aligns with the analysis of leading investment banks.
Analysis from Major Investment Banks
Morgan Stanley’s Andrew Sheets stated that the budget is “probably going to raise our forecast for growth in the U.K. over the near-term, but it could also provide a little bit of upward pressure on inflation.” This sentiment was echoed by Goldman Sachs, which revised its U.K. core inflation forecast upward by 0.2 percentage points for 2025, citing the effect of increased National Insurance contributions. They now estimate core inflation to end at 2.5% by the end of 2025. The upward revisions in inflation forecasts are balanced by the expectation that a freeze on fuel duty will alleviate pressure on headline inflation, which they only increased by a smaller magnitude (0.1 percentage point).
Impact on Bank of England Monetary Policy
Importantly, the combination of increased inflation and tighter fiscal policy creates uncertainty for the Bank of England’s monetary policy. The OBR and market analysts believe that the budget could force a deceleration in the central bank’s rate-cutting plans. This could translate to higher borrowing costs for businesses, potentially offsetting some of the projected economic growth. While a 25 basis point rate cut was still expected at the Bank of England’s next meeting, Morgan Stanley suggested that the rate cuts envisioned for the near future could be “a little bit slower than we initially thought.” Goldman Sachs agrees, anticipating a 25 basis points reduction next week, but expressing more uncertainty about the pace of subsequent cuts through the rest of 2025
In conclusion, Chancellor Reeves’ budget, while aimed at boosting economic growth and avoiding tax increases on workers, has generated considerable unease within the British business community. The significant increases in National Insurance contributions coupled with the minimum wage hike have sparked concerns surrounding job growth, wages, and the risk of increased inflationary pressure, significantly influencing economic forecasts and potentially reshaping the UK’s monetary policy trajectory.
