Cut national insurance to stimulate jobs market – IES

Speculation is growing there will be an emergency Budget in July. Photo: Han Yan/Xinhua News Agency/PA Images

Rishi Sunak should cut employers’ national insurance contributions for all staff if he goes ahead with an emergency Budget next month.

If we can suppress the virus, and if we can avoid a crash-out Brexit, then there’s every chance that we could see a strong recovery in demand next year. But clearly, there is a lot of uncertainty – and some still worryingly large ‘ifs’ – in there” – Tony Wilson, IES

That’s according to Tony Wilson, director of the Institute for Employment Studies, in a blogpost examining what the chancellor could do to support economic recovery.

Wilson says the UK is in the middle of an unemployment crisis “greater than any that we have experienced” and it is going to get worse. “Unemployment,” he writes, “is almost certainly the highest that it has ever been – higher even than the Great Depression – and as the job retention scheme starts to unwind in August it may well reach levels that would have been unimaginable until a few months ago”.

He argues that as well as the direct impact of the coronavirus there are “real” economic changes too, with weak business and consumer confidence, and likely “lasting change” in demand for sectors including hospitality, retail, transport, the arts and higher education.

But Wilson also believes there are reasons for cautious optimism. Unlike the credit crunch in 2008-9, household incomes have held up, thanks mainly to the government furlough scheme. Indeed, people have been paying off debt and the government has been “at pains to rule out” a return to austerity.

“If we can suppress the virus, and if we can avoid a crash-out Brexit, then there’s every chance we could see a strong recovery in demand next year. But clearly, there is a lot of uncertainty – and some still worryingly large ‘ifs’ – in there,” writes Wilson.

Despite Sunak’s announcement last week that businesses would have to start to pay their share of national insurance contributions from August for people furloughed, Wilson argues that reducing non-wage labour costs for all could have a “short-term, if often modest, positive impact”. Employers’ NICs are the single largest non-wage labour cost that employers face – a tax of 13.8% on earnings above £8,788 a year, equivalent to about £2,400 to the cost of employing someone on an average wage.

In his post, Wilson examines the relative benefits of raising the employer NIC threshold either for all existing staff, or just for new hires. He suggests targeting NIC cuts for younger employees, as they’re more likely to be adversely affected by the crisis.

“I would argue that government should reduce NICs for existing staff and not just new hires, that we should do it by raising the threshold, and we should err on the size of big but short-term stimulus – for example, a six-month stimulus to raise the threshold to the level of the personal allowance [for income tax] for all (£12,500) and to waive NICs entirely for those aged under 30,” he says.

He concludes: “Short run demand stimulus can make an important contribution to addressing this crisis, but it cannot be all of the response. Even more important is what we do on supply – to ensure that unemployed people are getting the help that they need to fill the hundreds of thousands of new jobs being created every month even now, and what will be over a million new jobs each month during the recovery.”

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