Cooking the Books 1 – A fuss about NICs
In the week before the budget last October the i paper carried an article headlined ‘Reeves warned NI business tax will hit workers’ pay’ with the subheading ‘Experts say the comments by the Office for Budget Responsibility show increasing employer NI is a tax on “working people”’.
In the event Chancellor Rachel Reeves did increase employer National Insurance Contributions (NICs), which led the media and opposition parties to claim that the government had reneged on its promise not to increase taxes on ‘working people’ (defined, in the end, as those in employment). We are far — very far — from holding a brief for the government, but the claim that the increase in employer NICs will push down wages doesn’t hold water.
In its comments for Reeves’s budget, the OBR repeated:
‘The specific changes to employer NICs increase the costs of employment for firms which is mainly assumed to be passed on to employees through lower real wages, and which also reduces employment.’
So, they weren’t actually saying that the increase would lead to this but that, in their calculations, they had assumed that it would. However, they didn’t explain why they assumed this.
As a measure that increases labour costs, it could be expected to have some effect on employment, but the assumption that it would lower ‘real wages’ (the amount wages can buy in relation to prices) is unwarranted. The OBR seems to have meant that it would result in employers increasing the price of what they are selling, resulting in workers being able to buy less with their wages. But this assumes that, faced with an increase in costs, employers can simply pass this on to consumers through increasing the price of their product, which is not the case.
The TUC understood the situation better. Employers, they pointed out, will:
‘have a range of options on how they can cover these increases. They can absorb the costs and many will choose this option. They could also raise productivity by investing in their business, raise the prices they charge customers, or seek to suppress wage growth in their organisation. It can be difficult to predict what balance of these approaches employers will opt for and it will vary greatly between firms and industries.
‘Workers will be particularly interested in the extent to which employers seek to shift the burden onto them by holding down wages. One thing is for certain – there is no automatic link between business tax and worker wages (…) how the costs are shared will depend on the growth trajectory of the business and economy and on the bargaining power of workers.’
This is substantially correct, although they could have also pointed out that the price increase option would only be open if any increase was ‘what the market will bear’.
It’s not true that a tax that increases employer labour costs would inevitably lead to lower pay. You can see this where labour costs are increased through workers obtaining a wage increase.
The employer would have the same options that the TUC mentions. If, as the OBR assumes, an increase in labour costs leads to ‘lower real wages’, then so should such an increase due to higher wages. It amounts to the old fallacy that an increase in wages is pointless as it merely leads to an increase in prices which nullifies it, a fallacy exposed by Marx in 1865 in his lecture to British trade unionists, later published as Value, Price and Profit.