Cabinet split emerges over National Insurance increase

·5-min read
Treasury Chancellor of Exchequer Rishi Sunak National Insurance
Treasury Chancellor of Exchequer Rishi Sunak National Insurance

A Cabinet split over a controversial plan to increase National Insurance has been exposed as allies of the Business Secretary said he has warned Rishi Sunak against going through with it.

Amid turmoil at Westminster, Kwasi Kwarteng is understood to have privately raised concerns with the Chancellor about a 1.25 percentage point increase in the tax that will take effect in April and cost the average worker an extra £255 a year.

Mr Sunak is understood to be holding firm in favour of the increase. He said on Tuesday that the Treasury has a responsibility to future generations to get Britain's debt under control, despite figures showing the Chancellor's fiscal headroom has increased because the Government borrowed substantially less than forecast last month.

There are growing signs that some senior ministers are rethinking the tax rise, which is forecast to raise more than £17bn a year, as Boris Johnson fights for survival amid a blizzard of revelations over Downing Street parties during lockdowns.

The Prime Minister refused eight times on Monday to confirm that he will introduce the levy - which is ostensibly intended to raise money for social care - indicating it could still be averted. The increase will hit at the same time as the energy price cap is increased, adding hundreds of pounds a year to domestic heating bills.

Mr Kwarteng opposed the tax increase before it was announced last summer, saying “I don’t see how we could increase National Insurance”, given the Conservative manifesto featured a “guarantee” from the Prime Minister that “we will not raise the rate of income tax, VAT or National Insurance”.

But decisions on taxes and spending are made by the Treasury and by the autumn the cabinet had agreed to the rise.

Last week Mr Kwarteng publicly conceded the tax will go up. He said it was important to pay for extra spending on health and social care via taxation, but did not praise national insurance as the best way to do this.

“It was right for the prime minister to have a dedicated tax rise to pay for those things," he told BBC Radio 4's Today programme, adding that steps were needed to soften the cost of living crisis.

It is understood the Business Secretary fears the increase, which is paid by both employers and employees, will harm living standards by squeezing pay packets, while also reducing hiring because the cost of every staff member to businesses is higher.

Official figures released on Tuesday showed the public finances are in better shape than previously feared, lending ammunition to opponents who want the tax raid to be postponed for a year.

The Government borrowed £16.8bn in December, lower than the £18bn forecast by City analysts as the economy held up more strongly in the face of the omicron wave.

It means that so far this financial year the Government has borrowed £146.8bn. This is substantial by pre-Covid standards but is £129.3bn smaller than the deficit over the same period of 2020-21.

Borrowing also came in £12.9bn less than the Office for Budget Responsibility had anticipated when the Chancellor drew up his autumn Budget in October.

However, Mr Sunak indicated this extra financial headroom should go towards lowering the deficit instead of cancelling the tax rise.

He said: “Risks to the public finances, including from inflation, make it even more important that we avoid burdening future generations with high debt repayments.

"Our fiscal rules mean we will reduce our debt burden while continuing to invest in the future of the UK."

Bethany Beckett at Capital Economics said that even with rising debt interest costs, Mr Sunak could cancel the tax hikes if he wished.

She said: "Our forecasts suggest the Chancellor still has enough fiscal space to cancel April’s rise in National Insurance."

Samuel Tombs of Pantheon Macroeconomics predicted that political factors will encourage Mr Sunak to use his financial wriggle room to cut energy bills instead of delaying tax rises.

“We think that some form of intervention from the Treasury to limit the increase in Ofgem’s energy price cap in April is likely," he said.

“We doubt, however, that the Chancellor will defer the introduction of the increase in National Insurance contributions in April. It is best politically to get large tax rises out of the way well before the next election, which likely will be held in May 2024.”

The Treasury raked in more tax receipts this December than last as business rates relief was cut back, bringing in £2bn in the month, up more than one-third on the year before. Fuel duty raised £2.3bn, up almost one-fifth following a rise in petrol and diesel prices. The take from stamp duty rose to £1.9bn, up by 44pc compared with December 2020, after a tax holiday fully ended in September, .

Strong employment and the end of furlough meant pay as you earn income tax raked in £16.3bn, up more than 11pc. Corporation tax receipts rose by a similar proportion.

Overall, current tax receipts climbed by 10pc to £68.5bn for the month.

By contrast, current government spending fell 1.5pc as the furlough scheme and self-employment support ended.

However, there are still upward pressures on spending. The UK's debt interest bill jumped from £2.7bn in December 2020 to £8.1bn in December 2021, driven by surging inflation which pushes up the cost of servicing index-linked bonds.

Spending on public sector pay rose by more than 9pc to £14bn in the month, and procurement - including vaccines and Covid tests - rose by 6.4pc to £18bn, in the face of the new wave of coronavirus.