Firms to pass on tax hikes through lower wages in long run, Bank executive says
Sarah Breeden, the Bank’s deputy governor for financial stability, also said firms might respond to the tax rises by cutting staff or raising prices.
A Bank of England deputy governor has predicted that higher national insurance taxes for UK businesses will lead to lower wages for staff in the “long run”.
Sarah Breeden, the Bank’s deputy governor for financial stability, also said firms might respond to the tax hikes by cutting employees or raising prices.
Speaking at the University of Edinburgh Business School, Ms Breeden said there was a large amount of uncertainty about how companies will respond to higher employment costs.
“Businesses have many potential margins of adjustment to increased NICs (national insurance contributions),” she said.
“At one extreme, they might respond by passing the entire cost through into lower wages – indeed, this would be my assumption for where it ends up in the long run.
“At the other extreme, they might seek to protect wages and increase prices, especially in the short term.
“They might also respond by reducing employment or by eating into their profit margins.”
She said the reality is likely to “sit somewhere between these extremes”, adding that it will depend on firms’ individual circumstances and overall levels of demand in the economy.
“There is, therefore, uncertainty around what these shocks will mean for medium-term inflation,” she said in her speech on Thursday.
The Bank of England has previously said it is weighing up the potential impact of measures announced in the Government’s autumn Budget.
In particular, it cautioned that a planned increase to the rate of employer national insurance could affect future inflation.
This is because businesses have said they might respond to higher taxes by raising prices, or by laying off existing workers.
Meanwhile, Ms Breeden said there had been “tentative signs” that economic activity had started to decline in the UK, with the latest official data showing negative gross domestic product (GDP) in October.
The policymaker said she would be focusing on how the recent slowdown, and how employers react to higher employment costs, might influence the outlook for UK inflation.
“To be clear, I expect bank rate to come down over time as the effects of the large shocks of the past continue to abate,” she stressed.
