A planned £26 billion ($33 billion) tax increase on businesses in the UK could lead to the loss of as many as 130,000 jobs, according to new analysis from Bloomberg Economics.
The research, published Thursday, suggests that if businesses pass the burden of increased employer National Insurance Contributions (NICs) onto employment, the unemployment rate could rise by as much as 0.4 percentage points.
The analysis explores two potential scenarios: job cuts and price increases. In the former, the reduction in employment would be a direct result of firms cutting hours or laying off staff. The latter would lead to a significant jump in inflation, potentially increasing the rate by up to 0.9 percentage points a year after the tax increase takes effect in April.
These findings significantly increase pressure on Chancellor Rachel Reeves, whose October 30th budget included £40 billion in tax rises. The potential job losses or heightened inflation risk undermining Reeves’ stated goal of making the UK the fastest-growing G7 economy.
The analysis highlights a policy dilemma for the Bank of England (BOE). Depending on whether the impact of the NICs hike primarily affects employment or inflation, the BOE’s response in terms of interest rate adjustments would likely differ dramatically.
Bloomberg Economics’ base case assumes a more even distribution of the impact across prices, wages, hours worked, and profit margins. However, the new research emphasizes the potentially severe consequences if businesses primarily respond by reducing employment. This echoes concerns raised last week by BOE Governor Andrew Bailey, who highlighted the risk of a larger-than-expected job reduction due to the tax hike, potentially exacerbated by recent labor hoarding. The BOE plans to release its own analysis on the impact of businesses absorbing the cost through specific channels.
Bloomberg Economics analysts also note that squeezed profit margins in recent quarters could increase the likelihood of businesses seeking alternative cost-cutting measures, further increasing the risk of job losses.
