The government's hike of employer national insurance will not raise the £25bn the chancellor has budgeted, as it will result in lower wages and in turn less income for the Treasury, according to the Institute for Fiscal Studies.
IFS director Paul Johnson said in his post-Autumn Budget analysis today (October 31), the revenue the government will actually rake in will be closer to £16bn after accounting for lower wages reducing the amount raised from employer NI, employee NI and income tax revenues.
Chancellor Rachel Reeves in yesterday's Budget announced tax hikes of £40bn, of which the majority - £25bn - was to come from a 1.2 percentage point hike of employer NI coupled with a halving of the threshold at which employers pay NI to £5,000.
Johnson said it was somewhat 'inevitable' that NI would have been raised given the scale of the tax rise required, especially as the government had ruled out changes to income tax, VAT or employee NICs.
But the measure, though a "better choice" than raising a range of smaller taxes, had some "downsides", he warned.
He said: "[NICs] are of course largely incident on wages. Increasing them increases the wedge between employment and self-employment, and between employment income and other income.
"But this is a better choice than trying to get big increases from a range of smaller taxes.
"It is also worth noting that, net, this increase will not actually get the Treasury anything like the £25bn stated on the scorecard.
"As the OBR note, it will result in lower wages, reducing the amount raised from employer NI and reducing employee NI and income tax revenues.
"That takes the net revenue down to some £16bn. On top of that there will be an effective £6bn of compensation for public sector employers."
Johnson said the Budget, which also saw IHT thresholds frozen, pensions being brought under IHT rules, and a hike of capital gains tax rates (through not on residential property), signalled a change of policy direction but did not present a "coherent strategy".
"If the government is really wanting change then it’s not just the levels of tax and spending it needs to look at, it’s how it prepares a coherent strategy, how it presents what it is doing, and how it builds confidence through transparent communication," he said.
Johnson took particular issue with the government's insistence that its measures would not affect 'working people'. He said in reality they would reduce household income growth, as the OBR's forecast showed.
"The OBR has reduced its forecast of household income growth, and expects income growth over this parliament to be lower than over any other parliament in modern times – except the last parliament," he said.
He also criticised the government's refusal to quash a rumours around cuts to the pension tax free allowance which had prompted some to cash in their lump sums early.
