BoJo's National Insurance Tax Rise May Hinder Post-COVID Recovery, Cause Unrest in UK, Scholars Warn

Chancellor Rishi Sunak is expected to deliver his autumn Budget on Wednesday with a focus on "building a stronger economy for the British people". However, British economic observers argue that additional money injections and National Insurance contributions increases are not enough to reinvigorate the UK economy.

The National Health Service is due to receive £5.9 billion ($8.1 billion) over the next three years to tackle treatment backlogs caused by the coronavirus pandemic in England as part of the government's autumn 2021 budget. To fund social services, which are growing too expensive for the government, Boris Johnson has proposed the Health and Social Care Levy which envisages increasing National Insurance contributions by 1.25% for almost everyone.

National Insurance Increases to Backfire on Brits

While there is common belief that the NHS and other social services need a certain boost, the question is how Brits will pay for this, says Dr Ian Crowther, a senior lecturer in banking and financial markets at the Department of Finance Accounting and Business Systems at Sheffield Hallam University.

Social services, which include maternity leave, sick leave, pensions, and the NHS, come from National Insurance contributions. Working members of British society usually contribute to national insurance through monthly salary deductions. After the proposed hike, the national insurance rate will soar to a whopping 13.25% in April 2022.

SNAP POLL: Britons are split 44% to 43% on raising National Insurance by 1.25pts to pay for NHS and social care

All Brits - 44% support / 43% oppose

Con voters - 59% / 34%
Lab voters - 33% / 55%

18-24 yr olds - 26% / 47%
65+ yr olds - 68% / 23%https://t.co/4ZxN7IzdmX pic.twitter.com/g7ybZdmPbH

— YouGov (@YouGov) September 7, 2021

Still, under the current economic circumstances this approach is fraught with risks, believes Crowther.

"[W]e're seeing wholesale changes in the way that the economy is working", Crowther says. "So, we're seeing changes in COVID. The market is starting to increase to get an improved market in terms of earnings, that's actually still very early. Yet we've got a lot of people with money saved up in bank accounts throughout the COVID period. So, quite naturally, what's happening now is people want to spend that money, but the products and services available to spend it on are not yet at full capacity. So, what that's doing is increasing inflation".

Soaring inflation is driving costs of food and household bills up; and a National Insurance contribution increase will become an additional burden on people's salaries, according to the academic. He notes that people "at the bottom end of the demographic survey" will be hit the hardest because they tend to have debts and are likely to face an increase in interest burden as well. What’s worse, as they are getting poorer they do not contribute enough to the economy, which creates a vicious cycle and stalls the growth, according to the academic.

The unfolding problem is "not just about inflation, it's not just about the interest, not just about the National Insurance, but it's about getting the wider economy going as well", argues Crowther.

National Insurance increases "will naturally reduce disposable income for most UK citizens", echoes Sheheryar Banuri, a development economist and Lecturer at the University of East Anglia. He does not rule out that coupled with inflation and post-COVID recession, the government's measure could cause "significant unrest" in the UK.

What Options Does the BoJo Gov't Have?

Seeking to tackle a potential crisis, a group of 30 UK millionaires came forward earlier this week and called on the chancellor to tax them and other rich people so that the cost of recovery would not fall "on the young or on those with lower incomes".

"We are proud to pay our taxes to reduce inequality, support stronger social care and the NHS, and to ensure that we’re building a more just and green society", an open letter published on a website Proud to Pay reads.

“A group of 30 UK millionaires have called on the chancellor to tax them and other rich people more because they can afford to pay it.”

Unfortunately, I suspect, the group of billionaires who pay £250,000 for ‘Advisory Board’ access, may disagree. ~AA https://t.co/6QcRJJ6syx

— Best for Britain (@BestForBritain) October 25, 2021

However, Tories are traditionally opposing any additional tax hikes on the wealthy, Ian Crowther notes.

"Naturally, the only way to fulfil all the initiatives are significant increases in taxation, along with cutting back on programmes, though what the cutbacks would be is a challenging issue", believes Sheheryar Banuri. "Nevertheless, it seems clear that there are significant difficulties ahead, and can really only be dealt with by a combination of increasing taxation, cutting spending and programmes, and structural reforms".