National Insurance rise will push inflation higher, MPs warn Boris Johnson

Report adds to pressure on government to tackle cost-of-living pressure

Liam James
Thursday 27 January 2022 02:48
Boris Johnson refuses to guarantee National Insurance rise will go ahead

The planned rise in national insurance contributions will push inflation higher, MPs have warned Boris Johnson in a report.

Inflation hit 5.4 per cent in December, the highest rate in 30 years, and is expected to rise further by April, when the 1.25 per cent NI rise will come into effect.

Households are already under pressure as prices rise in shops and energy bills continue to go up, sparking fears of an impending cost-of-living crisis.

In its report on chancellor Rishi Sunak's autumn budget, the Commons Treasury Committee said the NI rise will drive inflation up and cause prices to rise even higher.

The MPs also noted that the Bank of England has raised interest rates since the budget in October and is likely to raise them again, driving up mortgage costs for millions of homeowners.

The report said: “The OBR forecast states that the policy mix chosen at this budget will act as a boost to inflation, identifying in particular the increase in employer national insurance contributions, and the large fiscal loosening that took place in the Spending Review.

“The chancellor showed that he is alert to the fiscal risks of higher inflation and higher interest rates becoming entrenched. The Treasury should keep these risks at the forefront of their thinking when designing policies at future fiscal events.”

The warning follows reports of a cabinet split over the NI policy, with Kwasi Kwarteng, the business secretary, said to be the latest minister to privately speak out against the rise.

Despite protests from ministers and Tory backbenchers, Mr Sunak has indicated he will not change course.

In the report, the MPs also warned that the prime minister's desire to drive up wages could have dangerous consequences if it is not accompanied by a rise in productivity.

They said that this could lead to a wage price spiral, wherein employees seek higher wages in response to higher prices, in turn driving prices higher and so on.

The government has faced repeated calls to take measures to tackle the rise in the cost of living as families face being forced into poverty. Economic indicators for the year ahead are bleak and suggest that the outlook is only set to get worse.

The IMF has downgraded its UK growth forecast for 2022 to 4.7 per cent, from the 5 per cent predicted in October. It estimates higher inflation will not subside globally until 2023.

But the chancellor has been given some reprieve as new figures showed that government borrowing since the budget was £13bn less than forecast.

The NI rise is expected to bring in £12bn for the Treasury. The 1.25 per cent increase would cost a person earning £30,000 – above the national median – £255 this year.

The cost will be borne by employers as well as individuals. A survey by the Institute of Directors found that almost four in 10 businesses expect to raise prices to offset some or all of the cost of higher employers’ contributions.

Around one in five said they would “employ fewer people”, while 15 per cent said they would cut investment.

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