National Insurance rise furore: should the government delay?

At any other time, the controversy and political arguments around the raising of National Insurance Contributions (NICs) would be the UK’s top story. Yet, despite huge issues surrounding the government on ‘lockdown gatherings’, National Insurance is still making plenty of headlines, filling column inches and the airwaves.

Following Conservative MP David Davis’s call to scrap or postpone the government’s planned rise in NIC rates this April, prime minister Boris Johnson told the BBC on Monday night in response to repeated questioning that “if you want to fund our fantastic NHS, we have to pay for it – and this government is determined to do so”.

Johnson’s remarks came after Davis had earlier told BBC Radio 4’s Today programme that the forthcoming tax rise would add to the pressure on household finances. Davis warned that raising NIC by 1.25 percentage points, and then introducing a Health and Social Care Levy, had been based on “quite a lot of wrong data”, adding: “[The government] didn’t know at the time [they announced the NIC rise] that by April we would have the highest inflation for 30 years … that interest rates would be going up, that council tax would be going up, that fuel prices were about to rise by about £700 a year for an average family … they didn’t know quite what pressure there would be on ordinary people.”

The former Brexit secretary further argued the tax rise would reduce disposable income for “ordinary families” by “about 10%”, creating “a disincentive to work, for overtime and promotion [and] employment”, before going on to say: “[The NIC rise is] probably not going to raise anything like £12bn. It may even have a negative because it slows the growth of the economy.”

Davis’s remarks were echoed across the political spectrum, with Labour’s shadow financial secretary to the Treasury, James Murray, telling LBC: “For the Tories to pile an extra tax increase on working people is the absolute worst thing they could do.”

Businesses also expressed their concern about the rate rise. The Institute of Directors (IoD) released data illustrating concerns that the tax rise “presents little option to businesses but to raise prices further”, with IoD chief economist Kitty Ussher saying the rise in employers’ NIC is “of real and genuine concern to business leaders, particularly those running small and medium-sized businesses that are the growth engine of our economy.” 

Of the IoD’s 505 survey respondents, 38% said they will raise prices to offset some, or all, of the cost, while 19% said they would “employ fewer people”, and 15% said they would reduce investment. Ussher added: “Our data shows that the tax rise is itself inflationary at a time when prices are already rising fast. Faced with the forthcoming increase in the cost of employing their teams, many businesses are planning to raise prices to offset the cost and/or rein in on their hiring plans.”

The Institute of Fiscal Studies (IFS) argued that chancellor Rishi Sunak could feasibly delay the April NIC rate increase to ease the cost-of-living crisis, with IFS director Paul Johnson noting the £12bn tax rise “will be needed before long – government could certainly delay it. But could it credibly commit to introducing it next year, which will be a year closer to a general election?” Meanwhile, former PwC chief economist John Hawksworth tweeted: “Three questions on the planned NIC rise in April: [Firstly] will tax rises eventually be needed to put the public finances on a sustainable footing given the structural hit from Covid, Brexit and an ageing population? – Yes. [Secondly] is April 2022 the best time to start this? – No. [Thirdly] would higher NICs be the fairest and most efficient way to raise taxes when the time is right? – No, raising income tax would be fairer and taxing property more would be both fairer and more efficient. QED (particularly as politics also favours point 2, though not point 3).”