LONDON — U.K. Treasury chief Rachel Reeves acknowledged on Thursday that wage growth could be slower than initially expected following her recent decision to increase the employer tax, impacting the labor market directly.
On Wednesday, Reeves announced a tax hike amounting to approximately 40 billion pounds ($52 billion), aiming to address a fiscal gap she claims to have uncovered while also financing essential public services, thereby shaping the political landscape for the foreseeable future.
The most significant element of the new budget is a boost in national insurance contributions that employers are required to pay alongside their employees’ salaries, which is set to bring in around 25 billion pounds over the next five years. This tax, meant to finance social benefits and the National Health Service, is generally incorporated into general tax revenues and will affect salaries at a lower threshhold.
Reeves recognized that this financial adjustment could compel businesses to mitigate the increases by putting downward pressure on wages. “I am fully aware there will be repercussions,” Reeves stated in an interview. “It implies that businesses will need to manage some of these costs themselves through profits, and it is probable that wage hikes may be somewhat restrained compared to previous expectations.”
Her comments coincided with a warning from a distinguished British economic think tank that subdued wage growth may lead to the tax reforms yielding more revenue than anticipated, suggesting that Reeves may have to consider further tax increases in the upcoming years to sustain public services.
In its customary analysis of the budget, the Institute for Fiscal Studies (IFS) remarked that some economic forecasts appeared overly optimistic, especially regarding public sector spending.
The IFS predicts that the government might need to raise an additional 9 billion pounds the following year to prevent cuts in certain departmental budgets.
Although routine expenditures are poised to jump substantially following Wednesday’s budget — increasing by 4.3% this year and 2.6% the next — growth will significantly decelerate to just 1.3% annually starting in 2026.
Paul Johnson, director of the IFS, described adhering to the 1.3% growth projection as “incredibly challenging, to say the least.”
The center-left Labour Party achieved a resounding electoral victory on July 4, pledging to put an end to a series of controversies under previous Conservative administrations and to revive economic growth while rejuvenating public services. However, the measures unveiled by Reeves have evidently surpassed the conservative approach that Labour had championed during its electoral campaign.
Throughout the election period, Labour stated they would refrain from raising taxes on “working people” — a term whose definition remains widely debated. Although Reeves did not impose new taxes on income or sales, the Conservatives have claimed that increasing taxes on employers violates Labour’s election commitments and could ultimately result in diminished wages for employees.