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Increasing National Insurance contributions will lead to higher prices in the shops, a report by MPs has warned Boris Johnson.
The Commons Treasury Committee says that the planned increase in April risks driving up inflation while the country grapples with a cost of living crisis.
The 1.25 percentage point increase also applies to employers, who it is feared will seek to pass on the additional costs to consumers through higher prices.
With economists warning that inflation could hit seven per cent this year, the MPs note that the Bank of England may be required to raise interest rates again, in turn driving up mortgage costs for millions of homeowners.
In its formal report on the Budget last October, the committee also said that the Prime Minister’s attempt to drive up salaries risked compounding the problem and creating a “wage price spiral”.
The committee, chaired by Mel Stride, a Tory MP and former Treasury minister, added: "The Office for Budget Responsibility forecast states that the policy mix chosen by the Chancellor at this Budget will act as a boost to inflation, and it identified in particular the increase in employer National Insurance contributions, and the large fiscal loosening that took place in the Spending Review.
"The Chancellor showed in his speech that he is alert to the fiscal risks of higher inflation and higher interest rates becoming entrenched. The Treasury should keep these risks at the forefront of their thinking when designing policies at future fiscal events."
The report also echoed suggestions by Paul Johnson, the director of the Institute for Fiscal Studies, who said earlier this week that there was now "fiscal room" for the Government to postpone the rise in National Insurance Contributions.
It said: "The Chancellor has stated his ambition to cut taxes before the end of the parliament. In October, there was little room for manoeuvre, but there has been positive news from the public finances since then.
“While further good news may help him achieve this ambition, significant risks remain, most notably from the impact of inflation."
Its findings are likely to ratchet up pressure on Mr Johnson to delay the £12 billion a year increase, which is set to cost the average worker an extra £255 a year.
It came as Downing Street was braced for Sue Gray’s “partygate” report, after a day of confusion and speculation about when the findings will drop.
On Wednesday, a small group of government officials and lawyers were scrutinising the details she planned to put in the public domain, making sure the revelations do not undercut a police probe.
Ms Gray was said to be still editing the final wording of her report on Wednesday, raising the possibility that names and key details may yet be removed before publication.
Civil service unions are urging the Cabinet Office not to “hang out to dry” government employees. However, the Labour Party is demanding all evidence in the probe be published.
Some Tory MPs believe the report now may not reach the public domain until Monday, although Cabinet Office figures insisted Ms Gray could hand over her report whenever she wanted to.
Mr Johnson is already preparing a fightback for once the report is published, with new policy announcements to win over Tory MPs and an overhaul of Number 10’s “culture” expected.
On Thursday, he will announce a new drive to get 500,000 people back into work, by shortening the deadline the unemployed have to find a job while claiming benefits.
Mr Johnson has met 30 Tory MPs wavering on his leadership in face-to-face meetings in recent days, hearing a list of policy demands and gripes about his premiership.
One MP who saw him said: “I think he was quite sombre. I wouldn't say he was especially down or especially chirpy. It was a serious conversation in which I thought he was listening.”
The Prime Minister's allies have also set up a 100-strong “save Boris” WhatsApp group, where they coordinate media appearances.
Calls to postpone National Insurance rise
Sources told The Daily Mail that several backbenchers urged Mr Johnson to delay the NIC rise and ease the pressure on households. The wavering MPs are believed to want him to be "more conservative" - in exchange for supporting him into the next election.
The proposed tax rise comes as families face soaring inflation and the prospect of energy bills doubling to £2,000 when the price cap is lifted.
Kwasi Kwarteng, the Business Secretary, has privately raised concerns with Rishi Sunak about the rise, with three other Cabinet ministers also said to be in favour of postponing it.
Writing in The Spectator, George Osborne, the former chancellor, said he believed the Chancellor was instinctively against the increase.
“Rishi Sunak was right to insist last year that his neighbour’s penchant for extra spending had to be paid for, not borrowed through the deficit,” he wrote.
“But now the National Insurance rises loom at a time when real incomes are shrinking. We too reduced the deficit, but took a different approach. We controlled spending and shrank the state.
“That meant we could cut NICs on jobs, along with business tax and income tax. I don’t know for sure, but I suspect this would be Rishi’s preferred approach too.”
However, Liz Truss, the Foreign Secretary, insisted that the Government would press ahead with the plans - despite previously being one of the fiercest critics of the move.
"Cabinet has made the decision to proceed with the National Insurance increase and we're all behind that, and there are no plans to change that,” she told Sky News.
Asked if it was something that would be reconsidered, she said: "No."
Ratcheting up pressure on Mr Johnson further, the Commons Treasury committee said inflation could be exacerbated by the Government’s attempt to drive up wages.
The MPs pointed out that the Office for Budget Responsibility, the UK’s independent fiscal watchdog, had highlighted the National Insurance contributions rise as a factor contributing to “increased inflationary pressure”.
It comes just days after the Institute of Directors released new survey data suggesting that more than a third of firms would seek to pass on the additional burden to customers, while 18 per cent would also seek to hire fewer staff.
The MPs also pointed out that the rise would push taxes as a share of the economy to a 70-year high.
They added: “It already appears to be a significant challenge for the tax burden as a percentage of GDP to be lower at the end of this Parliament than at the beginning, because the Chancellor’s tax rises have already been announced, and his fiscal headroom to reduce them and still meet his fiscal target is small.”
Similarly, the committee also suggested the Government's focus on driving higher wages through creating more skilled jobs, alongside rises in the National Living Wage by 6.6 per cent to £9.50 an hour, could all contribute to higher inflation.