Can Reeves get away with a national insurance hike?

The Budget is not due for a fortnight, yet with every day that passes its contents seem to become clearer. This morning Keir Starmer gave an interview to the BBC where he twice refused to rule out a rise in employer’s national insurance contributions in the Budget. Instead, he repeatedly stressed that Labour’s manifesto promise was specifically that it would not raise taxes on working people. Asked for clarity on whether employers could face a national insurance hike later this month, Starmer would only say that his government would ‘keep promises we made in the manifesto’ and not ‘raise tax on working people’. He also warned that the budget would be ‘tough’.

The comments come after Rachel Reeves on Monday gave the clearest hint to date that businesses could face an increase in national insurance. The Chancellor argued that Labour’s election pledge not to increase NI only applied to employees. The Business Secretary Jonathan Reynolds made a similar comment on Sunday when he told Sky News’s Trevor Phillips that Labour’s promise not to increase the tax ‘was specifically in the manifesto, a reference to employees’.

It comes as the Tories have gone on the attack – arguing any rise in NI whether to the employee or the employer constitutes a manifesto breach. As the shadow chancellor Jeremy Hunt put it on Monday: ‘It’s obvious to most people that raising national insurance would breach Labour’s manifesto pledge to… not raise national insurance!’ Labour figures respond that the Tories urged them to rule out raising employer NI during the election campaign, so the Conservatives did not think the manifesto pledge did.

This story is striking for two reasons. First, why are ministers getting drawn into a game of what may or may not be in the Budget? While there may be a case for pitch-rolling a change to fiscal rules on borrowing for infrastructure spending (to prepare the markets), the standard response to questions about the Budget would traditionally be ‘no comment’. Secondly, even if something is technically true, it can fail a basic smell test. OBR analysis from 2021 found that raising employer national insurance does hit workers. The IFS’s Paul Johnson has already come out to say it would amount to a ‘straightforward breach’: ‘I went back and read the manifesto and it says very clearly “we will not raise rates of national insurance”. It doesn’t specify employee national insurance.’

The risk is Labour fall into the same territory that Philip Hammond found himself in 2017. The then-chancellor proposed a national insurance increase for the self-employed. At the time, ministers initially argued that it was in keeping with the election manifesto pledge not to put up national insurance, income tax or VAT. However, the government later U-turned after conceding that even if that could be argued on a technicality, it was still a breach in spirit. The question is whether Reeves can avoid that fate.