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Response to the Autumn 2024 Budget - NIESR
The Chancellor has changed the measure of debt used in the fiscal rules from public sector net debt to public sector net financial liabilities. While this is a step in the right direction, it still restricts public investment by not leveraging the value of fixed assets on the government’s balance sheet nor allowing enough time for public investment to generate returns through higher GDP
Rather than raising the rate of income tax, corporation tax or VAT, the chancellor has opted for a 1.2 percentage point rise in the rate of employer National Insurance Contributions (NICs) and a reduction in the threshold at which employers start paying NICs. As a tax on jobs, we expect this to lead to a fall in job creation and, over time, a rise in the unemployment rate.
The decision to keep personal income tax thresholds frozen until 2028/29 acts an increase in income tax for a significant portion of the workforce over the next four years. Given our forecast for wage inflation, we project that 2.9 per cent and 0.8 per cent of workers will be pushed into the basic and higher marginal rate brackets respectively in 2024/25.
The government has confirmed that the NLW is to rise by 6.7 per cent effective from April 2025, exceeding the average regular pay growth of 3.9 per cent projected for 2025. Moreover, the NMW for 18 to 20-year-olds will see a 16 per cent increase. This is the third consecutive increase in the NLW above average pay growth, which we estimate to affect over 3 million workers, most of whom are in the bottom decile of the income distribution.
Through the Corporate Tax Roadmap, corporation tax is confirmed to be capped at 25 per cent (the lowest rate in the G7) for the duration of this Parliament, and full expensing measures are to be kept in place. This is welcome news as it provides certainty for investors, which can help boost business investment and improve the potential long run trend rate of growth.
But businesses will face higher employment costs in terms of the above inflation rise in the NMW and the NLW, the higher rate of employer NICs and the lower NICs threshold for employers. Given that businesses with more than 10 employees account for more than 80 per cent of employment in the private sector, we expect significant negative impacts on employment and wage growth, especially in low-paid sectors such as hospitality.
The Chancellor’s announcements in the Autumn 2024 Budget sets the tone for fiscal policy over the course of this Parliament. There are some building blocks but not yet a firm foundation for stronger growth, higher living standards for the least well-off and sustained regional regeneration.
Rather than raising the rate of income tax, corporation tax or VAT, the chancellor has opted for a 1.2 percentage point rise in the rate of employer National Insurance Contributions (NICs) and a reduction in the threshold at which employers start paying NICs. As a tax on jobs, we expect this to lead to a fall in job creation and, over time, a rise in the unemployment rate.
The decision to keep personal income tax thresholds frozen until 2028/29 acts an increase in income tax for a significant portion of the workforce over the next four years. Given our forecast for wage inflation, we project that 2.9 per cent and 0.8 per cent of workers will be pushed into the basic and higher marginal rate brackets respectively in 2024/25.
The government has confirmed that the NLW is to rise by 6.7 per cent effective from April 2025, exceeding the average regular pay growth of 3.9 per cent projected for 2025. Moreover, the NMW for 18 to 20-year-olds will see a 16 per cent increase. This is the third consecutive increase in the NLW above average pay growth, which we estimate to affect over 3 million workers, most of whom are in the bottom decile of the income distribution.
Through the Corporate Tax Roadmap, corporation tax is confirmed to be capped at 25 per cent (the lowest rate in the G7) for the duration of this Parliament, and full expensing measures are to be kept in place. This is welcome news as it provides certainty for investors, which can help boost business investment and improve the potential long run trend rate of growth.
But businesses will face higher employment costs in terms of the above inflation rise in the NMW and the NLW, the higher rate of employer NICs and the lower NICs threshold for employers. Given that businesses with more than 10 employees account for more than 80 per cent of employment in the private sector, we expect significant negative impacts on employment and wage growth, especially in low-paid sectors such as hospitality.
The Chancellor’s announcements in the Autumn 2024 Budget sets the tone for fiscal policy over the course of this Parliament. There are some building blocks but not yet a firm foundation for stronger growth, higher living standards for the least well-off and sustained regional regeneration.
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