Employment: Tax Policy

Lord Petitgas Excerpts

Thursday 31st October 2024 Grand Committee

[Lord Petitgas (Con)]

My Lords, I thank my noble friend Lord Leigh of Hurley for this debate about the impact of tax policy on employment. I repeat the title, because I can see that the exam question has moved to the impact of the Budget on business. Unfortunately, I will probably fail as well.

I talked about a “boom in gloom” in the short debate on foreign investment in September. At that time, business had already grown fearful about slowing growth, with a foreboding that we were heading away from a market economy towards big state-led economic management. Confidence was waning. Employment is a barometer of business confidence and investment, so will this Budget shore up or further blunt such confidence? The answer boils down to whether business trusts the Government to spend their higher tax and new borrowings productively and deliver the future growth dividend ultimately to balance the books.

Many, if not most, are sceptical about this tax, borrow and spend Budget package. It seems doubtful that it can deliver the innovative entrepreneurial economy that the UK should aspire to. The OBR’s own revised forecasts on inflation, rates and growth made for poor reading overnight, while sovereign yields widened in the gilt market. That is not anecdotal; it was on the Financial Times website all day. Rates will stay higher for longer, increasing the cost of capital for the economy, the Treasury and mortgage holders.

The impact of these tax measures on employment is the key for growth. I shall frame this around three observations, first addressing the impact on business and employment. Business is facing a trifecta of a high minimum wage, increased NI and a new set of labour rights. Let us not pretend that, by taxing business, the impact will not fall on working people and consumers themselves. This is taxing employees through the backdoor. It will sap confidence, increase costs and hurt employment. An increase in income tax, although equally regrettable, would at least have been more transparent and given workers a clearer idea of the impact on them. It is rather complicated to get to the same money. The OBR report says:

“The rise in employer NICs in this Budget will further erode profits and we assume firms are only able to pass on around 60 per cent of the cost to employees in the short term”—


probably rising to more than 80%. Moreover, uncertainty about new labour rights represents a policy risk.

All this will feed into the real economy through high prices, low consumer spending and a slow labour market. This painful trifecta will raise costs for business, discourage expansion, and hurt staffing levels and hiring plans. Certain sectors, such as hospitality and retail, and SMEs, which cannot cushion from shocks easily, will have to pass on these higher costs if they can and, if they cannot, they may need to lay off. It is misleading to suggest that, by taxing business, you are not taxing employees—unless, of course, they are in the public sector. What analysis has been prepared, sector by sector and for SMEs, on the impact of these measures on employment?

My second point concerns inflation. We, along with the OBR, should worry about continued inflation. The “tax, borrow and spend” spree is happening at pace while the returns of large public investments, if any, will come through only in the long term. As the noble Lord, Lord Davies, said, a fundamental issue is the mismatch between borrowing the money now and spending it and the long-term returns; that is not to say we do not need more infrastructure. Confidence is therefore crucial to seeing us through the interim years. However, so far, the OBR, the markets and business are all showing grave misgivings. The costs of capital and of doing business in the UK have gone up. It is a difficult quandary and a real dilemma. Did the Government assess the impact of their new labour rights, raised minimum wage and public sector awards on inflation?

Let me end on the NHS. It is, as I see it, one of the case studies on investing in infrastructure for the long term. It binds two key aims: ensuring a healthy workforce, and the productive use of money. These are crucial, because the welfare bill is growing faster than GDP while too many working-age people are unfit to work. The Government have rightly said that they want greater emphasis on preventive care—I appreciate that this is not necessarily the Minister’s area of expertise—but preventive care is about telling people how to live their lives in healthier ways. Is money the obstacle, therefore, or is it more about finding the right language and legitimacy for the state to have these conversations? I say that not to belittle the huge issues facing the NHS, including its need for money, but to highlight the fact that it is not always about spending more money—and the same applies to education. It is also about setting productivity targets and changing the culture.