The way businesses react to the National Insurance increase is currently the “biggest issue” after the Budget, the head of the Bank of England said, as he warned of rising economic uncertainty in the UK and globally.
Andrew Bailey, speaking in the Financial Times Global Boardroom, said it was not yet clear what impact the tax change might have on UK inflation.
Bailey added: “The level of uncertainty is high at the moment. Certainly, some of that is local and some of that is global.. “I think the biggest issue now in the near future is the response to the National Insurance change; How companies balance the mix of prices, wages, employment level and what is taken at the margin is an important judgment for us.”
Chancellor Rachel Reeves announced in her autumn budget statement that the employer National Insurance rate will rise from 13.8% to 15% in April next year.
The secondary threshold, the level at which employers start paying tax on each employee’s salary, will also be lowered from £9,100 a year to £5,000.
The move has led to a group of companies saying they will be hit hard by increased costs, which they may end up passing on to employees and customers.
Bailey said the bank had set out a “range of options” to analyze the potential economic impact, “some of which would mean higher inflation and some of which would mean lower inflation,” adding: “So there is uncertainty and we need to see how the evidence develops.”
Companies need time to figure out how to absorb the larger costs and develop their strategies, Bailey said, adding: “I think as we get into the spring we’ll have a better idea.”
He confirmed that the central bank was also analyzing the potential impacts of the incoming Donald Trump administration in the US on the UK economy.
He said the impact of Trump’s proposed plans to raise tariffs on all US imports is “not at all easy to predict,” adding, “It obviously moves trading prices but it also depends on how other countries react to it, and how exchange rates react to it as well.”
