Labour is raising the worst possible tax

A levy on jobs is a surefire way to leave you with far fewer of them

It doesn’t count as a “tax on working people”. It won’t break any manifesto promises. Most of the voters won’t even notice, and it is guaranteed to raise huge sums of money.
The Chancellor, Rachel Reeves, and the Prime Minister, Sir Keir Starmer, may think they are being very clever by raising the rate of National Insurance (NI) that employers have to pay for everyone on their payroll. There is just one catch. They are increasing taxes in the most damaging possible way to the economy – and the UK will pay a high price.
When the Budget is finally unveiled at the end of this month, a rise in NI for employers now looks a near certainty. In TV interviews on Tuesday Sir Keir Starmer again pointedly refused to rule it out, while the day before Reeves stuck doggedly to her line that it had not been dismissed.
It is not hard to understand why that is happening. The Government desperately needs more money to fund its extravagant pay awards for its union backers in the public sector and to pay for expensive follies such as GB Energy and the National Wealth Fund. 
It has already found out that all its clever ideas for taxing the “rich” won’t work, simply because they will either flee abroad, or else reshuffle their assets to lower the amount of money the Government takes from them.
Even worse, Labour has talked itself into a corner with its alarmist warnings of a £22bn “black hole” in the public finances. It is not going to get that from taxing non-doms or slapping VAT on school fees, but if it doesn’t raise taxes from somewhere the markets may well take fright. 
A hefty rise in employers’ NI is one of the few options left, and it will at least raise a serious amount of money while also being virtually impossible to avoid.
Starmer and Reeves are playing plenty of semantic games with what does and doesn’t count as a rise in taxes on “working people”, and whether their manifesto pledge only four months ago not to increase NI covered only what employees pay. That is up to them. Even so, the Government is making a huge mistake.
First, the failure to keep promises is staggering. By playing around with the small print Sir Keir may impress his former colleagues in the legal profession. But no one else will be taken in. 
In reality, the promise not to raise NI was a clear manifesto commitment, and one that has now been cynically broken. The hundreds of thousands of small businesses in particular that will now face huge rises in their monthly payroll costs won’t quickly forget that, nor will they quickly forgive it.
Political leaders can break promises if they want to but there is always a price to be paid. Reputations are not easily rebuilt after a betrayal on that scale.
Second, and more importantly, this is the worst possible way to raise extra tax revenue. To start with, it is a tax on jobs. If you tax cigarettes people smoke less, and if you tax alcohol they drink less, so it is a mystery why anyone could fail to understand that if you tax jobs you will end up with far fewer of them. 
We will be imitating countries such as France and Spain with their punishing payroll taxes. As we go down that track we can’t be surprised if we end up with French and Spanish levels of unemployment, and especially youth unemployment.
Next, it hammers small and growing businesses. As any entrepreneur will tell you, the most perilous moment in the development of any new company is when it hires its first two or three people. That is when finances are often stretched to the limit. The Government will be making that moment far riskier, and even more expensive.
The result? Many more small businesses will inevitably fail. Even worse, many founders will decide it is too expensive to hire people and remain as one person operators, limiting their scope for growth. We will be crippling precisely those enterprises that we will need the most of, if we are to have any hope of getting the economy growing again.
And of course it is completely untrue that these costs won’t be passed on. We have plenty of studies from around the world to tell us that employment taxes are ultimately not paid by the company itself. 
They are paid for by the workers in the form of lower wages, for the simple reason that an employer has to look at the total cost of keeping someone on the payroll, and if the tax is higher the salary has to be lowered to make up the difference. 
Then, greater costs for a company are also paid for by customers in the form of higher prices – because costs always have to be paid eventually. Indeed an NI rise will fuel a round of inflation as well, forcing the Bank of England to keep interest rates higher for longer.
Add it all up and this plan will punish the economy at the worst possible moment.
When the Chancellor unveils her horror Budget, appropriately enough just before Halloween, it looks inevitable that we will see a tax on jobs as well as punitive tax rises.
The Labour Government may think it is being clever, arguing it has technically stuck to its manifesto not to raise taxes on working people. But it will do huge damage to the economy in the process – and the price paid by the country will be a high one.