Rachel Reeves, the Chancellor, faced fierce criticism yesterday over claims she protected “working people” by refraining from raising their National Insurance (NI) contributions in her recent Budget. Critics, including former Bank of England official Andrew Sentance, labelled her assertions an “outright falsehood,” pointing to a £25 billion increase in employer National Insurance contributions.
Rising inflation and economic concerns
The controversy follows the release of inflation figures for November, which showed a rise to 2.6%—an eight-month high. Critics argue Labour’s policies are derailing Britain’s economic recovery, with UK manufacturing slumping and retailer Shoe Zone announcing store closures, citing the October Budget’s impact.
Ms Reeves defended her actions, stating her Budget had avoided burdening working people with higher National Insurance contributions. However, Mr Sentance retorted, “Businesses and economic forecasters have made clear that higher employer NI means higher inflation and a bigger wage squeeze for working people.”
Interest rates and economic challenges
As inflation persists, the Bank of England is expected to hold interest rates at 4.75% following today’s Monetary Policy Committee (MPC) meeting. Optimism about significant rate cuts in 2025 has diminished, with markets now anticipating just two reductions rather than the four previously hinted at by Bank Governor Andrew Bailey.
Deutsche Bank’s chief UK economist, Sanjay Raja, warned that the MPC remains far from “declaring victory on inflation.” He predicted businesses would raise prices in early 2024 to offset the increased costs stemming from the NI hike, adding further pressure to households.
Stagflation fears loom
The spectre of stagflation—where economic growth stagnates while inflation rises—is becoming a growing concern. Julian Jessop, economics fellow at the Institute of Economic Affairs, remarked that Labour’s promises to revitalise growth were sounding “even more hollow” in light of recent data.
“The chances of a much worse outcome are increasing,” he said.
Kallum Pickering, chief economist at Peel Hunt, argued that addressing supply-side issues is key to economic recovery. “Until we fix the supply side of the economy through deregulation and by shrinking the bloated state, real incomes will grow more slowly than they could,” he stated.
Labour’s economic leadership questioned
Sir Keir Starmer defended Labour’s economic policies during Prime Minister’s Questions, claiming the government had “stabilised the economy.” However, Shadow Business Secretary Andrew Griffith lambasted Labour’s decisions, stating they were “taking our economy in completely the wrong direction.”
In an interview with GB News, Mr Griffith compared the situation to a plane with “so many metrics in the red” that one might consider “looking for the parachutes.”
Official forecasts indicate that Ms Reeves’s Budget will add 0.5% to inflation, exacerbating financial pressures on households and businesses.
National insurance impact on businesses
The Chancellor’s changes to employer National Insurance contributions—raising the rate from 13.8% to 15% and lowering the income threshold for payments from £9,100 to £5,000—have hit sectors like retail and hospitality particularly hard.
Shoe Zone attributed recent store closures to the Budget’s tax changes and increased minimum wage, describing some locations as “unviable.”
Kate Nicholls, CEO of UK Hospitality, urged the Chancellor to reconsider these measures to safeguard jobs and businesses. “We urgently need the Chancellor to rethink these changes to protect businesses and team members,” she said.
Manufacturing decline
Adding to the grim economic outlook, the Confederation of British Industry (CBI) reported that manufacturing output fell in the three months to December at its fastest rate since mid-2020. CBI lead economist Ben Jones cited the Budget as a key factor, noting that it had “increased costs and led to widespread reports of project cancellations and falling orders.”
Economic growth slows
The UK economy, which had been the fastest-growing among G7 nations in the first half of the year, has since slowed to a crawl. Growth went into reverse in November, marking a worrying trend for the months ahead.
Inflation, which had appeared to retreat earlier in the year, reaching 1.7% in September, has risen for two consecutive months, dashing hopes of sustained relief for consumers.
Calls for policy reassessment
As the government faces mounting criticism over its handling of the economy, pressure is growing for a reassessment of policies that critics argue are hindering recovery. Shadow Chancellor Mel Stride labelled Labour’s decisions as “irresponsible,” adding, “Working people cannot afford Labour.”
The ongoing debate highlights the urgent need for measures that address inflation, stimulate growth, and provide tangible relief to households and businesses navigating a challenging economic landscape.
