Tax Hike on UK Businesses May Cost 130,000 Jobs, Economists Say
(Bloomberg) -- UK Chancellor Rachel Reeves’ £26 billion ($33 billion) tax hike on businesses may cost as many as 130,000 jobs if bosses choose to pass on the burden by reducing employment, according to analysis by Bloomberg Economics.
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The unemployment rate could rise by as much as 0.4 percentage point should firms respond to the increase in employer National Insurance Contributions primarily by cutting hours worked, the research published Thursday found.
If they instead raised prices to protect profits margins, inflation would jump by up to 0.9 percentage point one year on from April, when the tax increase comes into force.
The findings increase pressure on Reeves, who has been criticized by businesses shouldering the brunt of the £40 billion of tax rises announced in her Oct. 30 budget. Job cuts or higher inflation risk undermining her ambition to make Britain the fastest-growing economy among its Group of Seven peers.
It also lays bare the policy dilemma potentially facing the Bank of England, with different outcomes likely to trigger opposite responses in terms of interest rates.
Bloomberg Economics’ base case is that the impact of Reeves’ NICs hike will be spread evenly between prices, wage growth, hours worked and profit margins. However, the new analysis revealed the implications if businesses pass on the increase through one particular channel.
“In a world of higher unemployment, interest rates might probably have to fall a little faster than we’ve penciled in – we forecast 125 basis points in rate cuts by April 2026,” wrote economists Ana Andrade and Dan Hanson.
“By contrast, the current environment means the BOE would likely slow down the pace of easing in response to the uptick in inflation, to ensure the climb proves temporary.”
BOE Governor Andrew Bailey said last week that there is a risk that the tax hike may result in a bigger-than-expected reduction in employment.
He told Parliament’s Treasury Committee that labor hoarding in recent years may mean that it’s easier for businesses to let go of workers. The central bank plans to share its own analysis on the impacts if businesses handed down the cost through a particular channel.
Andrade and Hanson also said that a squeeze on profit margins in recent quarters “raises the chance that businesses consider other ways to offset costs.”
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