UK Treasury chief admits business tax rise could lead to lower wages than expected

LONDON – U.K. Treasury chief Rachel Reeves acknowledged on Thursday that wages may rise less than previously thought as a direct result. budget decision Increasing the taxes businesses pay to their employees.

On Wednesday, Reeves raised taxes by nearly 40 billion pounds ($52 billion) and announced more government borrowing to cover the debt. The hole he claimed to have identified in public financesfinance cash-strapped public services and invest in a range of infrastructure projects in a budget that will determine the political course for years to come.

The biggest measure, worth around £25bn over five years, was an increase in national insurance contributions that employers pay on top of workers’ wages. The tax, which was originally designed to pay for benefits and help fund the state-owned National Health Service but is actually included in general tax collections, will also be paid at a lower salary level.

Reeves admitted the changes could lead employers to shoulder the additional financial burden, putting pressure on wages.

“I realize there will be consequences,” Reeves told the BBC. “This will mean that businesses will have to absorb some of this through profits and will likely mean that wage increases may be slightly less than they would otherwise be.”

His admission came as a highly respected British economic think tank warned that lower-than-expected wages could mean tax rises are larger than thought, adding that Reeves may have to raise taxes again in coming years to support public services.

In its traditional budget assessment the next day, the Institute for Fiscal Studies said that some forecasts, especially regarding public spending, were “unrealistic”.

The IFS said the government would need to raise potentially up to a further £9bn next year to avoid cutting spending in some departments.

Although daily spending will rise rapidly after Wednesday’s Budget, rising by 4.3% this year and 2.6% next year, it will slow to just 1.3% annually from 2026.

IFS director Paul Johnson said sustaining a 1.3% increase “will be extremely difficult, to say the least.”

There were some visible concerns in the markets that budget amounts would not increase and growth would remain relatively low. Interest rates on UK bonds rose on Thursday, while sterling fell against most other currencies, including the US dollar.

“The quiet optimism that seemed to radiate during Rachel Reeves’ speech has evaporated and a higher risk premium for Britain’s debt has returned,” said Susannah Streeter, head of currency and markets at stockbroker Hargreaves Lansdown. “Bond yields will remain volatile as institutions that finance government debt take a more skeptical view of what the bloated investment budget will be spent on.”

The centre-left Labor Party won landslide election victory July 4 after promising to end years of turmoil and scandal under successive Conservative governments, grow the British economy and restore battered public services. But the scale of the measures announced by Reeves on Wednesday exceeded Labour’s cautious general election campaign.

During the election, Labor said it would not raise taxes on “employees”, a loose term whose definition has been hotly debated in the media for weeks. Although Reeves did not increase income or sales taxes, the Conservatives said raising taxes on employers was a breach of Labour’s election promise and would lead to falling wages.