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Will a rise in national insurance reduce UK jobs?

The current Labour government has put in place plans for a rise in National Insurance contributions (NICs) from April 2011 of 0.5% on employees and 0.5% for employers. Obviously, if Labour says ‘left’ the Tories have to jump and say ‘right’ and vice versa. Well, we can only expect this during an election period, although it is pretty much a common occurrence most of the time. This overall 1% increase is expected to rake in an extra £8bn in tax.

But, what is the significance of national insurance and will an increase result in fewer jobs?

It is estimated that during the 2019-10 financial year which has just ended, NICs will have raised £94.9bn compared with receipts from income tax of £134.1bn, VAT of £67.2bn and corporation tax of a relatively miserly £33.4bn. This is according to figures published by HM Revenues and Customs last month.

Will the government's planned increase in national insurace cost jobs?

This has led the Tories to make a proposal which would cancel most of the proposed rise in NICs and reduce the increase by £5.6bn. This policy has been supported by over 100 UK business leaders who have complained that the Labour policy would amount to nothing less than a tax on jobs. In an interview with the Guardian, Vince Cable, Lib Dem treasury spokesman said: “I just find it utterly nauseating – all these chairmen and chief executives of FTSE companies being paid 100 times the pay of their average employees lecturing us on how to run the country.”

Whilst it is true that NICs are a payroll tax it does not mean that it is in fact a tax on jobs. Does it really mean that fewer employees will offer themselves for work if they have to lose another 0.5% of income? Would they resign if it was income tax being raised by the same amount and not NICs?  Would it be true that firms will put their expansion plans on hold if their costs went up another half a per cent as employers? I find this a very doubtful proposition.

It should also be borne in mind that over 6 million Britons now work in the public sector. Who is paying their wages and NICs? No clues here! So the government will actually be increasing their own employment costs and reducing the potential effect of the rise in NICs.

According to Tory plans they are expecting to cut £12bn in government spending this financial year and will use nearly half of that to curb the rise in NICs. But surely we are supposed to be cutting the government borrowing requirement not offsetting the effect of planned cuts. And this is where the whole argument comes full circle. If the Tories are planning to make even bigger efficiency savings within government departments this means that they will be buying fewer computers; less paper and paperclips; not so many chairs, etc, etc.

This means the companies making the computers, paper clips and chairs will sell fewer of their products. This may lead to lower profits and lower corporation tax. Also, they may have to cut back on their workforce!!

Basically, any cutbacks in government spending or increases in taxation could be considered a ‘tax on jobs’ but there is no reason why a rise in NICs should be singled out. Given that the OECD has just said that they expect the UK to grow faster in the middle of this year than many of the other major economies, the chances are that employment might rise rather than fall anyway so the question will never arise.

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Posted in economic growth, Employment, government borrowing, government spending, labour markets, macroeconomic policy, Public Finances

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