Budget likely to hurt working people and do little for economic growth

The Government came into office promising to prioritise growth. But the reality of their first Budget – heavier burdens on business and more borrowing for public sector capital spending – does not inspire much confidence in their approach. 

Coming alongside an inflation-busting increase in the minimum wage and heavy-handed changes to employment law, higher employer National Insurance Contributions will be a bitter pill for firms to swallow. Businesses will see their costs rise and it will be workers who pay the price – in the form of lower wages, reduced benefits, and fewer job opportunities. The idea that this Budget does not increase taxes on workers is an economic fantasy. 

While rejecting an extension to the freeze on income tax and national insurance thresholds is welcome, it does not undo the damage elsewhere. They will still remain frozen for now, meaning the effects of fiscal drag will continue to eat into our pay cheques for the next 4 years.

Meanwhile, the government is putting an awful lot of faith in its ability to choose and deliver public sector capital projects that deliver meaningful economic benefits. Few outside Whitehall will share their optimism. Greater emphasis on assessing the costs and benefits of capital spending is welcome, but a better approach altogether would have been to focus on eliminating barriers to investment by the private sector.

Elsewhere, the worry is that Britain’s international competitiveness and economic dynamism are facing death by a thousand cuts. Individually, the measures taken on Capital Gains Tax, non-doms, and stamp duty might not make headlines. But taken together, they paint a sorry picture of the way things are going. 

Without a radical, reformist agenda – a focus on the fundamental causes of our economic malaise – this government faces the same fate as its immediate predecessors: getting stuck managing Britain’s relative decline, with no clear plan to break free of it.” 

Tom Clougherty

IEA Executive Director

A wealth of economic evidence shows that taxing e-cigarettes leads to more people smoking. Taxing vape juice shows that the government is not serious about its ‘smokefree’ ambitions.   

“Reeves says that yet another ‘one-off’ tax hike on tobacco will dissuade vapers from switching back to smoking, but with 26% of the cigarette market already in the hands of organised crime, the legal price of cigarettes is irrelevant to a growing number of smokers. Tobacco duty revenue has fallen by £1.5 billion in the last two years and it will go on falling, despite the tax rate rising, because smokers feel no moral duty to buy legal cigarettes and give money to politicians who so obviously hold them in contempt.

Cutting draft beer relief so that a pint in a pub is 1p cheaper doesn’t come close to compensating from this tax raid. Drink 600 pints and get one pint free? It is a cheap gimmick.

Dr Christopher Snowdon

IEA Head of Lifestyle Economics

Labour has, as expected, substantially upped the minimum wage rates. This will affect the pay, directly or indirectly, of well over three million workers. This will add to the other costs imposed on employers either explicitly in the budget or implicitly as a result of new work rights. While it may not lead immediately to job losses, the extra pressure on smaller employers in particular is likely to send some to the wall in the medium term. 

The quite extraordinary increase in pay – 16% – for 18-20 year olds is part of the transition towards paying all adult workers the same minimum wage. It will make younger workers less attractive to employers and may well spark a rise in the youth unemployment rate as employers prefer older and more experienced recruits. It will certainly make considerably more difficult the task of bringing the large number of inactive young people into employment.

In the longer term, basing pay not on the productivity which workers bring to the employer but on what bureaucrats consider to be their needs will lead employers to automate many jobs, to contract work out to the self-employed, or to switch production to other countries.

Professor Len Shackleton

IEA Editorial and Research Fellow