Chancellor Rishi Sunak is under renewed pressure from MPs and business groups to rethink plans to increase national insurance next month, as fears grow that Russia’s invasion of Ukraine will dramatically worsen the cost of living crisis and plunge the economy into “stagflation”.
Both Tory and Labour MPs believe Sunak can still be persuaded to ditch the 1.25 percentage point rise – announced last September to fund the NHS and social care – and want him to use the potentially devastating effects of events in Ukraine on prices as justification for what they say is an urgently needed U-turn.
Former cabinet minister David Davis said on Saturday that history showed big rises in oil and gas prices tended to trigger stagflation – when prices soar and economic output collapses at the same time. What was needed, he said, was lower taxation as part of a concerted strategy to stimulate growth.
Davis said: “The case for dropping this rise is even stronger after recent events. We know there are those in government who favour cancelling the rise, and this [Ukraine] gives it a reason for changing its mind.”
Many senior Tories, including cabinet minister Jacob Rees-Mogg and the chair of the Treasury select committee, Mel Stride, have already called for the 1.25 percentage point rise to be dropped. But the government vowed before the Russian invasion of Ukraine to push ahead.
Now, however, the economic context has deteriorated. The invasion has caused oil and gas prices to rise steeply, while supplies from Ukraine of everything from barley to copper and nickel are disrupted. Ukraine is known as the “bread basket of Europe” and its ability to provide for foreign markets is expected to be severely hit, with a consequent effect on prices.
Today the Federation of Small Businesses urges ministers to mitigate the impact on its members of the national insurance rise – and rises in dividend taxes – warning that, without help, businesses in the very areas the government has promised to “level up” will be hardest hit.
The FSB wants an increase in special allowances that give small employers discounts on their national insurance bills, to offset the effects of the rise. Its analysis shows that the rise will add more than £3,000 to the annual tax bill of the average small business. Those businesses will also have to cope with an increase to £9.50 in the “national living wage” for employees over the age of 23 from early April.
FSB national chair Mike Cherry said: “The government’s levelling-up plans are now at serious risk. The chilling impact of national insurance hikes will hit the pay of those in regions that need help the most.”
“Slamming small firms with a jobs tax hike will put the brakes on investment, upskilling and growth within communities most affected by the pandemic.
“At its forthcoming spring statement, the government can still make a difference by increasing the employment allowance to £5,000 and adopting our proposal to take an additional 200,000 small firms out of the business rates system in levelling up target areas.”
The government’s analysis says that in the 2022-23 tax year, someone earning the median basic rate taxpayer’s income of £24,100 will pay an additional £180 a year in national insurance, while someone earning the median higher rate taxpayer’s income of £67,100 will pay an additional £715. It says the rise will also have a “significant impact” on more than 1.6 million employers.
Labour is also intensifying its calls for the rise to be dropped. Shadow chancellor Rachel Reeves said the timing could not be worse for householders or businesses: “Many are feeling their money already stretch less far. Our British businesses hold the key to our economic recovery – this is not the time to put yet another burden on them. The government are trapping us in a high-tax, low-growth cycle. It’s time for them to look again at Labour’s proposal for a one-off windfall tax on oil and gas producers to cut household energy bills by up to £600 by getting rid of VAT on home energy bills and extending the warm homes discount.”
In January, Boris Johnson and Sunak wrote a joint newspaper article insisting they would press ahead with the rise despite pressure from their own backbenchers to think again.
“We must go ahead with the health and care levy,” they said. “It is progressive: the burden falls most on those who can most afford it.
“Every penny of that £39bn will go on crucial objectives – including 9 million more checks, scans and operations, and 50,000 more nurses, as well as boosting social care.”