​Tax Hikes, Inflation, and the Economic Trap We're In

Since the pandemic, I've been writing more and more about the economy. It wasn't intentional. Like many, I wanted to inform the industry during COVID-19—what the latest government decisions meant for business. Then came the budgets, election promises, and endless analysis of how fiscal policies would shape our future. And yet, here we are, staring at a harsh economic reality with little sign of the prosperity promised by politicians.

During the 2024 UK General Election, A good friend told me that both major UK parties were boxing themselves in by pledging not to increase certain taxes. At the time, I dismissed it as political cynicism. But now, post-election and post-budget, I see his point more clearly. Labour's mantra— "We won't raise taxes on working people"—might sound noble, but it ignores the reality that higher employer NICs don't exist in isolation. As Milton Friedman wisely said, "The real cost of government is measured by what it spends, not by the receipts labeled taxes." By targeting businesses with these additional costs, we're not just redistributing wealth; we're eroding the very foundations of economic growth and prosperity.

Take Rachel Reeves's recent statement on employer National Insurance contributions (NICs). She insists that increasing NICs on employers isn't a tax rise on employees. On the surface, it's a clever political manoeuvre. In her words: " We were clear in our manifesto: we said we would not increase the key taxes that working people pay—their income tax, National Insurance, and VAT." While technically accurate, this framing leaves much unsaid. Businesses, especially small and medium enterprises (SMEs), don't absorb these costs in isolation—they inevitably pass them on, whether through reduced wage growth, higher prices, or limited hiring.

The impact is already being felt. Employer NICs have risen from 13.8% to 15.05%. According to the British Chambers of Commerce, over 81% of employers report that these increases have significantly affected their operations. This includes higher staffing costs, reduced investment budgets, and, for many, the difficult decision to raise prices. The hospitality industry, for instance, has been particularly hard-hit. Already struggling pubs, restaurants, and cafes now face additional pressures that jeopardise their recovery post-pandemic. Several operators have reported freezing pay increases, delaying hiring, or cutting staff hours to cope.

However, it’s not the minor change in the NIC rate itself that poses the biggest challenge—it’s the reduction in the threshold at which NICs start. Only about 15-20% of the cost increase is due to the rate change; the majority is driven by the shift in the threshold, which affects a much larger portion of wages. Yet, there are mitigations that many businesses can take advantage of. For example, no employer NICs are payable on the earnings of employees under 21 or apprentices under 25, up to the upper earnings limit (UEL). This exemption, along with the apprenticeship NIC relief, provides a much-needed buffer for businesses employing younger workers. While the increase in the minimum wage for 18-year-olds adds to cost pressures, these exemptions help offset the impact and still make it worthwhile to employ younger people.

Even retail giants aren't immune. Sainsbury's recently announced plans to cut over 3,000 jobs, including the closure of all remaining in-store cafés and certain food counters. The company cited a "challenging cost environment" exacerbated by increased employer National Insurance contributions and a rise in the national minimum wage. CEO Simon Roberts stated, "We are facing into a particularly challenging cost environment which means we have had to make tough choices about where we can afford to invest and where we need to do things differently to make our business more efficient and effective." This highlights how even major corporations are struggling under the combined weight of tax increases and rising operational costs, reflecting the broader challenges facing businesses across the UK.

Series: Reagan White House Photographs, 1/20/1981 - 1/20/1989Collection: White House Photographic Collection, 1/20/1981 - 1/20/1989, Public domain, via Wikimedia Commons

Employees might not see "a tax" on their payslips, but make no mistake—they're paying for it. Higher prices for everyday goods and services and stagnating wages create a perfect storm that erodes disposable income and quality of life. As Friedman aptly put it, "Nobody spends somebody else's money as carefully as he spends his own." This principle is clearly at play when businesses face rising NICs and must pass those costs onto others, whether through reduced wages, price hikes, or fewer job opportunities.

This isn't just anecdotal. Economic principles—and common sense—back it up. As Friedman's famous adage goes, "There's no such thing as a free lunch." Every policy decision has a cost. When you burden businesses with higher taxes, those costs ripple through the economy. Employers pass them on to consumers, cut jobs, or slash wages. And who suffers most? Ordinary people.

Wage inflation adds another layer to this problem. The rise in the national minimum wage for 2025 is intended to help workers cope with rising prices, but it creates a circular challenge: businesses raise wages to keep up with inflation, then increase prices to cover those costs, further fuelling inflation. This well-intentioned cycle places even more strain on businesses already dealing with tax hikes and rising operational expenses.

Let's look back at the Cameron-Osborne era. Their austerity measures—focused on cutting public spending—were widely criticised. According to the Institute for Fiscal Studies, their approach relied heavily on spending cuts, which made up 80% of their fiscal strategy initially. While this reduced the deficit on paper, it didn't foster economic growth. It arguably stifled it. By shrinking public investment and failing to stimulate demand, these policies left the economy stagnant for years. The lesson here is clear: cuts alone don't work. You can't simply tighten the purse strings and expect growth to follow. Instead, we need policies that empower businesses, incentivise investment, and drive productivity.

Employer NIC increases and other rising costs like business rates, energy bills, and corporation tax hikes do the opposite. These combined pressures choke growth by increasing costs and discouraging hiring. As Friedman argued, "The government solution to a problem is usually as bad as the problem and very often makes the problem worse." Burdening businesses with taxes like employer NICs is a classic example of this principle at play.

Milton Friedman's wisdom continues to resonate: "If you put the federal government in charge of the Sahara Desert, in five years, there'd be a shortage of sand." It's a blunt statement, but it captures the essence of why government overreach often leads to inefficiency and stagnation. By taxing businesses heavily, we're not solving our economic challenges—we're compounding them.

The government's approach feels like it's punishing every group: businesses, consumers, and workers alike. And yet, this strategy isn't solving the problems it's meant to address. Public services aren't improving, growth is stalling, and inflation remains high. So, who benefits? Certainly not the average Briton.

On the Ceres Podcast, we've discussed these topics all the time. If you haven't listened yet, join us. We need more voices questioning these policies and advocating for real solutions. Because here's the bottom line: you can't tax your way to prosperity. If we want a thriving economy, we need to empower businesses, reduce bureaucracy, and embrace the principles of economic freedom that Friedman championed.