National Insurance Contributions (Secondary Class 1 Contributions) Bill

Baroness Noakes Excerpts

2nd reading
Monday 6th January 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, this Bill delivers one of the most destructive policies invented by this Labour Government. I will not deal with the fact that it breaks a manifesto promise, though it does, or talk about its impact on much of the social fabric of our land, from charities to childcare, though the damage that it will do is immense. Instead, I will focus on its impact on businesses and the onward impact on their customers and employees.

First, let us get a couple of things out of the way. The Minister gave us his usual diatribe about the so-called black hole which the Government allege that they inherited. He must be getting embarrassed about going on about this all the time. He knows that the Office for Budget Responsibility has not backed the Government’s story on the black hole. He knows that a fair chunk of the £22 billion can be ascribed to the massive pay increases given to some public sector workers in return for zero productivity. He must also know that an even bigger black hole is already emerging as the economy goes into reverse as a result of the Budget and as some spending promises excluded from it have to be funded. No more nonsense, please, about black holes.

While we are at it, I hope we will have no more nonsense about the Truss mini-Budget. It did not crash the economy. GDP certainly did not crash—in fact, its trajectory hardly budged. However, since Labour came to power, growth has ground to a halt. There was a dislocation in bond markets and interest rates peaked but, as the Bank of England’s analysis has shown, the Bank itself was to blame for at least two-thirds of that, due mainly to its negligent oversight of LDI pension strategies. As my noble friends Lady Neville-Rolfe and Lord Forsyth have pointed out, interest rates are now higher than they were after the Truss Budget, whether you look at the short-term gilt rate, the long-term gilt rate or the premium over the bund rate. All this feeds into today’s mortgage rates, and the Government need to own the fact that it is their Budget that is having an impact on today’s mortgage costs. It is very clear which Budget has been worse for people with mortgages.

The Chancellor has dressed up her dreadful policy choice on national insurance by saying:

“We are asking businesses to contribute more”,—[Official Report, Commons, 30/10/24; col. 818.]


as if businesses themselves will be paying more tax to fund the public expenditure largesse in the Budget. This has been exposed as at best naive and at worst downright misleading by a host of commentators, starting with the Office for Budget Responsibility and going on through many others. Not a single analysis shows that businesses will be “contributing more”, except in the narrow technical sense that they will be writing cheques to HMRC for the increased national insurance bills. All the analysis points to the impact ending up on jobs, prices and wages.

The OBR reckoned that, even in the first year—2025-26 —60% would be passed on to employees and consumers and that this would rise to 76% by the second year. The National Institute of Economic and Social Research has pointed to higher unemployment and weaker wage growth. This is not theory. The Bank of England’s decision-maker panel in December found that, while most businesses expect lower profit margins, over 50% expect to raise prices and reduce numbers and 40% expect to lower wages.

The policy is highly regressive, which ought to worry the Benches opposite. The Institute for Fiscal Studies has highlighted the disproportionate impact on employing people at the bottom end of the wage scale. The NI changes mean that the cost of employing somebody on the minimum wage will rise by 3.2%, compared with 2.5% for those on median wages and 1.8% for those earning twice the median wage. The Centre for Policy Studies has taken this further by calculating the tax burden on labour, known as the tax wedge: overall, the tax wedge for someone on minimum wage will rise to 21.3%, which is even higher than the figure we inherited in 2010 from Gordon Brown.

When businesses come to manage these increased costs, the option of lower wage rates does not exist for those on minimum wage, and so we can expect employers to reduce their numbers instead. Higher up the wage scale, employers will be looking to reduce wages as well as numbers. National data are already showing weak job vacancies, and recruitment companies, which are often the canary in the mine, are issuing profit warnings, as employers are already turning away from recruitment.

What does all of this add up to? The pain of job losses for employees will knock on to higher unemployment benefits; lower profits and wages will result in lower taxes for the Exchequer; and all of us will face rising prices which will feed into inflation, thereby keeping interest rates higher than they would otherwise have been. It is hard to think of a more disastrous economic policy, especially in the context of a Budget which could not have been more anti-growth if it had tried.

Business confidence has been in retreat since before the Budget. Businesses are now facing an unholy trinity of national insurance rises, significant increases in the minimum wage—especially for younger employees—and the Government’s employment law reforms. This is not an environment in which businesses will want to invest. Indeed, many sectors will face retrenchment. This morning, the British Chambers of Commerce said that many of its members expect to cut back on investment. The British Retail Consortium has warned of shop closures. Hospitality businesses will be on insolvency watch. This is no way to grow the economy. The Government’s growth mission is starting to look like mission impossible.

The Government must be wondering whether the gain is worth the pain. The OBR calculated the static yield from national insurance increases as £26 billion by the end of the Budget forecast period, but it then forecast that the net yield would fall to only £16 billion, due to the direct and indirect behavioural impacts. In addition, the Government have said that they will fund the public sector for the additional costs which will fall on to public sector employers, amounting to around £5 billion. It is inevitable that the public sector will have to pay more for public services provided by private sector suppliers when they pass on the extra costs in prices. So we have all this pain for businesses, employees and consumers, plus the opportunity cost of lost economic growth, for a net figure which is probably south of £10 billion. That is just two-thirds of 1% of the Government’s total expenditure at the end of the Budget period. Is it worth it?