'Wrong signs': Scotland business leaders issue recruitment freeze alert over Rachel Reeves' UK Budget

It has been mooted that Chancellor Rachel Reeves could announce an increase to employer contributions to National Insurance when she sets out her government’s first Budget on Wednesday. However, she has been warned any changes to National Insurance cannot be at the expense of investment and growth for businesses.

It comes as Sir Keir Starmer confirmed funding for five freeports across the UK and a new investment zone will be set out at the Budget. It has not yet been confirmed if any of the new freeports will be situated in Scotland. However, it is understood they will be spread across the UK, not just in England.

Dr Liz Cameron, chief executive of the Scottish Chambers of Commerce, said of next week’s Budget: “The potential rises in National Insurance contributions and the application of National Insurance contributions to employer pension contributions would send the wrong signs to the business community.

“These increases will impact the bottom line for many firms and their staff, hindering confidence, investment and exacerbating already high labour costs. Indeed, our latest research indicates that labour costs remain the top cost pressure for businesses in Scotland.

“We understand that the fiscal backdrop is a challenge for the Chancellor, but any changes made must not be at the expense of investment and growth. The solution does not lie in increasing the cost of doing business.”

Colin Borland, director of devolved nations at the Federation of Small Businesses, said: “The UK government has been very clear on the importance of economic growth and the fact it underpins their plans to invest in public services

“Given that, I would be surprised if they really want to make it more expensive to retain or hire staff. It is the dynamic and adaptable smaller firms, who already employ more than 900,000 people in Scotland, who will drive the economic recovery.

“Margins are tight and running costs high for many small firms. There is no doubt that hiking jobs taxes would lead to recruitment freezes - or worse - and make pay rises less affordable.”

Mr Borland suggested other measures to boost growth should be taken instead, such as uplifting the employment allowance.

Ms Reeves is widely expected to increase employer contributions to National Insurance in the Budget, after saying Labour will not increase taxes on “working people”.

However, former work and pensions secretary Lord David Blunkett said Sir Keir and Ms Reeves’s plans would end up hitting workers in the pocket.

The Labour peer wrote a letter in The Times saying a tax hike on millions of small businesses would hurt workers by reducing employers’ pension contributions.

He said: “The widespread reporting of a possible extension of employers’ National Insurance in next week’s Budget is very worrying.

“It is one thing to increase the rate of National Insurance, and quite another to levy this on employer pension contributions. I would advise strongly against this.

“We need more employers contributing more than the basic 3 per cent and, with it, the corollary of savings and investments, not less. I sincerely hope the rumours are well wide of the mark.”

Lord Blunkett’s warnings were echoed by former pensions minister Sir Steve Webb.

He said: “It is widely accepted that the UK has an ‘under-saving crisis’ - even the government estimates that around 12 million people are not saving enough for a decent retirement. Increasing the cost to employers of providing good pensions will reduce the amount employers are willing to contribute, making the problem worse.”

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It comes as both the Institute for Fiscal Studies (IFS) and the Office for Budget Responsibility warned any increases to employer contributions in National Insurance would be passed onto workers in the form of lower wages, lower pensions and fewer jobs.

Helen Miller, from the IFS, said: “They are a tax on the earnings of working people. In the long run, expect the majority of a rise in employer National Insurance contributions to be passed on to workers in the form of lower wages.”

Elsewhere, the head of the IFS Paul Johnson said an increase in employer contributions would be a “straightforward breach” of Labour’s election manifesto.

Kirsty Blackman, the SNP’s work and pensions spokeswoman, said: “It’s clear there are very serious concerns, right across the political spectrum, that the Labour government’s plan to break its manifesto commitment and impose a National Insurance tax hike on millions of small businesses will hit workers in the pocket.

“There is a very real danger this Labour Party jobs-tax would be deeply regressive. Experts are warning any increase will be passed onto workers through lower pay, lower pensions and fewer jobs.

“Worse still, Labour’s regressive tax hike will hit the wages of pensions of workers on low and middle incomes, who make up the majority of the workforce.”

Ms Blackman added: “The SNP has repeatedly called for the Chancellor to publish a full analysis of the impact that this Labour Party tax hike will have on workers’ pay, pensions and jobs - and how it will affect economic growth and small businesses with tight margins - before imposing it.”

Analysis by the House of Commons Library, commissioned by the SNP, has meanwhile shown Scotland’s block grant has fallen to its lowest share of UK government spending in nearly a decade.

The analysis showed the proportion of Westminster spending on Holyrood had dropped from 8.2 per cent in 2015/16 to 7.6 per cent as of July this year. The SNP said this meant Scotland’s block grant was worth £6.4 billion less than it was in 2020/21 – a drop of 12.7 per cent.