“This rise in NI is going to cost hundreds of thousands of jobs – all business leaders are saying they will employ fewer people if this goes ahead.”
Jeremy Hunt MP, Shadow Culture Secretary, BBC Newsnight 6 April 2010
The row over national insurance rages on. Labour says a percentage point rise pencilled in for April 2011 is necessary to help repair the hole in the public finances; the Conservatives have pledged to scrap the worst of this increase in the “tax on jobs”.
Things hotted up when a plethora of business leaders came out in support of the Tory plan. Last night a Tory frontbencher claimed the tax increase would cost “hundreds of thousands of jobs”. It’s a big number – is it true?
Firstly, an independent estimate from the Centre for Economics and Business Research. Last year they modelled the effect of a 1 per cent employers’ national insurance rise on small and medium-sized businesses, which make up 58 per cent of the private sector workforce. This found that – by 2021 – there would be 57,000 fewer jobs.
“You can explain it in fairly intuitive terms,” said Charles Davis, a senior economist who worked on the report. If you make it more expensive for an employer to hire someone, you make it less likely for them to take on staff.
CEBR’s research didn’t cover the entire workforce – but if you extrapolate their 57,000 across the workforce you’d get around 100,000 jobs. Not exactly resounding backing for the “hundreds” Hunt suggests.
The Labour party, meanwhile, points out that national insurance was increased in 2002 to pay for increased NHS spending – and employment continued to rise.
We weren’t able to get hold of a specific forecast from the Treasury, but a spokesman pointed out that it predicts unemployment to be 1.75 million in 2010, before falling to 1.5 million in 2011 and one million by 2014. This takes into account all the financial policies announced by the time of the budget – including the NI rise.
The Tory-leaning thinktank Policy Exchange has also used a respected economic model to look at the effects of a 2p rise in NI – double that proposed by the government – on employers’ and employees’ national insurance.
This seemed to add an alarming one million to the unemployment count by 2013. The report pointed out this was “so implausible as not to constitute a useful basis for policy analysis”.
The thinktank also used a different model which related any rise in NI more closely to a squeeze in pay. This suggested a five rather than six-figure increase in unemployment in the next few years, but ended up with unemployment lower than it would otherwise have been.
Still, the authors caution that they’re not sure how robust these forecasts are – and point out that, based on wider academic evidence, they expect an NI rise to have a negative effect on employment.
Economic evidence suggests a NI rise will lead to fewer jobs, though Labour disputes this.
But we haven’t been able to find any solid estimate that backs up Hunt’s “hundreds of thousands” claim. It doesn’t seem unrealistic to make a cautious estimate of 100,000 – but that’s not what Hunt, admittedly not an economist, said last night.