Interview: IoD’s new chief economist delivers damning verdict on Tory tax hikes

After just a month or so into the job, the freshly appointed chief economist of the organisation that represents British business leaders is wasting no time in weighing in on the ails of the UK economy, shooting down one area in particular – tax.

Kitty Ussher of the Institute of Directors (IoD) has slammed the Tories’ decision to hike national insurance 1.25 percentage points and urged the government to ease the tax burden on business and households at the upcoming budget.

“With hindsight, the government went too far and overshot what they needed to do in March’s budget. And then after that they raise a flat tax through national insurance. They’ve gone too far and they need to go back,” she told City PM in an exclusive interview.

Ussher, a former Labour MP during the latter years of the Blair and Brown governments and the newly crowned IoD chief economist, delivered a damning verdict of the Tories’ tax assault on Brits, swotting the national insurance hike away: “I don’t think there’s any way of saying this will have a positive impact on businesses.”.

The government has come under fire for increasing the tax burden on Brits at a time when many are still struggling with the damage the Covid-19 crisis has inflicted on household finances. The spectre of a cost of living crisis is also looming over households across the country, sparked by soaring fuel and energy prices and accelerating inflation.

Businesses, meanwhile, are grappling with staying profitable while swallowing higher raw material and staffing costs. The national insurance tax hike will eat further into firms’ margins.

“I’m not convinced the government needed to raise employers’ national insurance contributions as tax receipts have actually come in much stronger than expected,” Ussher said.

A raft of economists and business leaders threw down the gauntlet to Chancellor Rishi Sunak last week, urging him to use the additional leeway provided by the economy growing at a faster rate than first thought in the second quarter of this year to launch a growth focused budget on October 27.

The criticism comes as Prime Minister Boris Johnson and Sunak have reportedly struck a deal to wean the government off borrowing to finance spending. Under the agreement, any new spending announced at the upcoming budget and spending review must be financed by reductions in spending elsewhere or tax hikes. The deal is intended to give the government more fiscal room to cut taxes in the run up to the 2024 general election.

However, Ussher warned the national insurance hike “will disincentivise hiring” at a time when the labour market is being left to stand on its own two feet after 18 months of support from the furlough scheme was pulled last Thursday.

Mismatches between the supply and demand for workers is the key issue plaguing the jobs market at the moment.

Severe worker shortages are causing headaches for businesses across the country. Britain’s logistics system has been derailed by a scarcity of HGV drivers, leaving some firms unable to deliver services amid a lack of stock.

Experts, including the Bank of England, have predicted worker shortages will ease now furlough has ended.

However, Ussher is sceptical.

”There isn’t this massive number of people sitting around who are about to become available in the labour market. I would be surprised if the end of furlough solved the labour market’s problems.”

Ongoing worker shortages could ramp up the cost of living crisis by raising prices at each stage of the supply chain. This would prompt businesses to increase prices, and in turn likely cause workers to demand higher wages to keep up with inflation, generating a wage/price spiral.

But, Ussher does see a way out through earmarking funds at the next budget to create an entire “skills architecture” to improve productivity.

“Initiatives like the Kickstart apprenticeship scheme are great, but they are piecemeal and apply to a very specific part of the labour market. We want to create a general sense that every single person can upskill or retrain and is supported by the government to do so.”

At a time when the labour market is about to undergo an enormous amount of churn, that could be money well spent.