UK Chancellor under pressure to reconsider National Insurance increase

The Chancellor of the Exchequer, Rishi Sunak, is under pressure to reconsider the introduction of the proposed national insurance tax hike (scheduled for April later this year) following the release of public finance data.

Data released by the Office for National Statistics showed that Government borrowing in December 2021 was £16.8 billion - £7.6 billion less than the amount borrowed in the same month of 2020 but still extremely high, with this being the fourth-highest December borrowing figure on record.

The UK government has accumulated a high level of debt as it has had to borrow to afford to pay for expensive initiatives (implemented to alleviate pressures on agents in the economy during the COVID pandemic) including stamp duty holidays and the furlough scheme.

The Office for Budgetary Responsibility predicted that borrowing in the first nine months of the 2021-22 financial year would be £12.9 billion higher than the actual figure. The OBR attributes the low deficit to higher income tax, corporation tax and VAT revenue.

This figure of £12.9 billion is close to the £12 billion in revenue predicted to be raised by the national insurance tax increase, leading to calls by some for the government to postpone the rise.

Resolution Foundation economist James Smith said ‘’This fiscal room for manoeuvre makes it inevitable that the chancellor will set out a plan to deal with the cost of living crunch.’’ Institute of Economic Affairs economist Julian Jessop agreed with this sentiment, stating that the chancellor had sufficient ‘’fiscal room’’ to abandon the rise. ‘’The economy has recovered more quickly than expected, creating a ‘’growth dividend’’ for the Treasury.’’

The government has not responded to these calls and when questioned as to whether the rise would definitely be going ahead, Johnson’s spokesperson stated that there are ‘’no plans’’ to change the date of introduction instead of decisively saying ‘’yes’’.

A tactic usually employed by chancellors is to raise taxes towards the beginning of their term in parliament and cut them before an election. The cut will be more salient in people’s minds at the next election which, the government hopes, will encourage citizens to vote for the incumbent.

Instead of abandoning the NI increase, the chancellor also has the option to use this ‘’fiscal room’’ to reduce pressures on households and firms from the cost of living crisis. This could be in the form of a targeted support package, for example. However, Sunak is unlikely to take this option due to two main reasons - the lower level borrowing was somewhat offset by the huge amount of interest needed to be paid on the loans and the time period over which this targeted support would be needed is uncertain due to rising inflation.

The Institute for Fiscal Studies warned that the long-term upward pressures of inflation would continue, regardless of whether or not the increase was abandoned.


Written by Deandra Peiris Research compiled by Kristina Njeru


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