Raising National Insurance to fund social care overhaul will hurt growth, economists warn

 Raising National Insurance to fund social care overhaul will hurt growth, economists warn

Boris Johnson and Sajid Javid are being urged to rethink plans to put up National Insurance - AFP

Boris Johnson and Sajid Javid are being urged to rethink plans to put up National Insurance – AFP

A National Insurance hike will deal the UK’s recovery up to a £6.5 billion blow, risk thousands of jobs and worsen inequalities, economists have warned as the Prime Minister readies a tax raid to fund a social care overhaul.

Boris Johnson was urged to reconsider the proposals to pay for elderly care by tapping the tax on 25 million workers and 1.4 million employers, with forecasters warning that higher hiring costs will probably hit jobs.

The PM’s plans to solve the social crisis are expected to be unveiled this week, but have faced a backlash from businesses that have dubbed the proposed hike a “jobs tax”.

The 1 percentage point NI hike preferred by Number 10 would dampen Britain’s recovery, roughly reducing GDP by 0.15 per cent, worth £3.3 billion in pre-Covid output, according to Capital Economics. The 2 percentage point rise that Health Secretary Sajid Javid is said to be pushing for would hit GDP by 0.3 per cent, a £6.5 billion hit, cutting the money in workers’ pockets and firms’ hiring power.

The Centre for Economics and Business Research (CEBR) said younger people and low earners would be worst affected by a proposed tax rise to help older Britons. It estimates that workers in the Covid-hit retail, hotel and restaurant sectors will pay an extra £100 to £200 from a one per cent to two per cent hike, while wealthy workers who have retired will pay nothing extra.

“There will be a GDP impact through the reduction in spending of those at the lower end of the income spectrum who will see the rise in NI contributions,” said Josie Dent, an economist at the CEBR.

“Increases in National Insurance contributions may have an impact on employment, at a time when increasing employment is likely to remain an economic priority,” Ms Dent said.

“This could easily be the difference between hiring an extra junior worker or not.”

The CEBR estimates that a typical small business with 50 employees will pay an extra £10,000 to £20,000 annually, depending on the size of the tax rise. If a quarter of smaller firms do not hire one extra employee because of the tax, it would cost 350,000 jobs, it said.

Helen Miller, deputy director of the Institute for Fiscal Studies, called the plans to target one tax to raise the money rather than rethink the broader system as “unambitious”.

Tax breaks for older people

She said: “We already have big tax breaks on people who are older and the self employed.

“The proposal is to make those bigger, so we can make bigger tax breaks relatively for the self-employed and for older people.”

Ms Miller added: “Rather than just thinking about how you get this quick cash, we should be thinking about the shape of our tax system.”

John O’Connell, chief executive of the TaxPayers’ Alliance, said the Government “should be cutting National Insurance instead”.

“We need economic policies that will create rapid growth post-pandemic. Raising national insurance will only stifle the recovery,” he said.

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