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Rachel Reeves brings the era of big pay rises to a crushing end

Rachel Reeves
Wage growth has been slowing sharply since Rachel Reeves’s Budget tax raid – Simon Walker / HM Treasury

Rachel Reeves once said she would “wince” when looking at her bank account. It’s a familiar tale for millions of Britons, but has been made easier recently thanks to surging pay rises.

Yet all that now looks to be over, with booming salaries increases running out of steam – and the Chancellor herself is to blame.

Just as pay packets started creeping back, gradually repairing the damage of the cost of living crisis, bosses began tightening their purse strings again.

Pay growth has slowed from the peaks of more than 8pc in 2023 – when workers were scrambling to regain spending power lost to soaring inflation – to below 6pc now. The annual pace will slow further to 3.5pc in a year’s time, the Bank predicts, marking the weakest increase in wages since the pandemic.

Company surveys make clear it is the Chancellor’s policies that are at fault. Reeves’s £25bn raid on employers’ National Insurance Contributions (NICs), which came into force last month, is hammering businesses.

The tax raid increases the rate of NICs from 13.8pc to 15pc, and reduces the earnings threshold at which it kicks in from £9,100 per year to just £5,000, meaning those who employ low-paid and part-time workers are particularly hard hit.

Bosses are nominally the ones who pay the tax, but in practice the cost is also shared with workers through lower wages, as well as customers, who pay higher prices.

“In response to NIC changes some firms say they are likely to offer pay settlements of one to two percentage points less than otherwise. All employers are looking to try to mitigate higher costs somehow,” said the Bank of England in its Monetary Policy Report on Thursday.

That represents a shift from the initial assumption that, given the tight jobs market, most of the tax rise would be paid by consumers through higher prices, says Sir Dave Ramsden, a deputy governor of the Bank.

“In the autumn when we were talking about this, there were lots of discussions that this was going to be inflationary,” he says. “There still will be some element of pass through that margin, but what our agents are telling us is that, actually, it will be pushing down on wages relative to what they would have been.”

That is if you have a job at all. The Bank notes that “firms have cited April’s increase in employer NICs as a reason for weakness in employment growth”.

This is particularly severe for small businesses, according to the National Institute of Economic and Social Research.

“A large part of the heat, whether you look at NICs or the national minimum wage, falls on small and medium-sized enterprises,” said Arnab Bhattacharjee, at the Institute.