These 2 Policies are Crushing the UK Economy

Economic growth in the UK unexpectedly shrank by 0.1% in January 2025, a dramatic slowdown from the 0.4% growth reported for the previous month. Yet, KPMG forecasts 1.7% GDP growth for the UK this year. The country will need to grow while battling with elevated inflation, possibly touching 3.7% in the first half of the year. Pressure is also likely to continue on the labour market and trade frictions could increase. All this means economic uncertainty is inevitable.

How the UK economy actually fares will depend on the government’s policy responses. For now, two policies may be dragging down the economy.

1. National Insurance Contributions

Contrary to the name, National Insurance Contributions (NICs) are not insurance at all. It is a direct tax to be paid. Insurance companies are subject to market competition, which keeps rate increases in check. On the other hand, the NIC exists in a monopoly with no checks. It is a government contribution, which means it is non-voluntary. Employees and self-employed people pay NICs once their earnings reach certain thresholds. Additionally, employers have to pay NICs on their employees’ earnings too.

As of April 2025, employers in the UK will face an increase in National Insurance Contributions, set to rise from 13.8% to 15%. Plus, the threshold for this rate will drop from £9,100 to £5,000 of an employee’s salary.

Source: BCC Insight’s Unit, in partnership with professional services firm AAB.

Increased National Insurance Contributions (NICs) could harm the UK economy by raising business costs, potentially leading to job losses, wage stagnation, and reduced investment, while potentially impacting consumer spending and overall economic growth. Here’s a more detailed breakdown.

Impact on Businesses

Higher NICs mean businesses will face increased labour costs. These costs are likely either lead to higher prices for consumers or reduced profitability for the organisation. Reduced profitability, in turn, could lead to less investment in staff, training and growth initiatives. Since hiring directly impacts the amount of contributions, businesses might reconsider recruitment plans or eliminate redundancies to cut costs.

Certain sectors, like hospitality, which rely heavily on staffing, could be particularly affected. Smaller companies may be hit harder than MNCs, as it is more difficult for firms with limited capital to absorb the extra costs. NICs have the power to break the backbone of the UK economy, with SMEs comprising more than 99% of businesses in the country.

Impact on Employees

Increased NICs might translate into wage stagnation, with many businesses passing on a significant portion of the increased employer contributions to employees in the form of lower wages. And lower wages, in turn, tend to translate into reduced consumer spending, which impacts every sector of the economy. Plus, if businesses reduce hiring or cut jobs, unemployment will rise.

Impact on the Wider Economy

Increased costs for businesses, coupled with potential wage stagnation and job losses, could dampen overall economic growth. If businesses cut jobs or wages, it will lead to less income tax and NICs for the government, potentially undermining the intended fiscal benefits of the policy. The government may then struggle to meet its budget targets and fund public services.

Higher costs and reduced economic growth could erode business confidence, leading to further uncertainty and potentially impacting investment decisions.

2. National Living Wage

As of April 1, 2024, employers must pay an hourly National Living Wage (NLW) of £11.44 to workers aged 21 or older, up 9.8% from the previous minimum wage. While the NLW aims to boost wages for low-paid workers, its implementation has a negative impact on the UK economy. The hikes lead to job losses, reduced investment and increased costs for businesses, especially small and medium-sized enterprises. Here’s a deeper dive into the potential downsides.

Job Losses and Employment Retention

The NLW raises the minimum wage, increasing labour costs for businesses, especially those employing a significant number of low-wage workers. Some businesses might choose to hire fewer employees or reduce working hours to offset the higher wage costs, potentially leading to job losses or reduced employment retention, especially for part-time workers.

Sectors like hospitality, retail and cleaning and maintenance, which rely heavily on low-wage labour, could face the greatest challenges in absorbing these wage increases. Research suggests that the NLW has led to a reduction in employment retention rates, particularly for part-time workers. In fact, one study found that a 1% increase in the NLW resulted in a reduction in employment retention of around 0.56% for women working part-time.

Reduced Investment and Productivity

Faced with increased labour costs, businesses might respond by reducing investment in training, capital spending or other areas that could otherwise boost productivity in the long term. This could reduce productivity and competitiveness in the market in the longer term. Small and medium-sized businesses, which often have limited financial resources, may find it harder to absorb the annual increases in the NLW rates, potentially leading to unsustainable debt or owners paying themselves below the NLW.

Combined Pressure on Businesses

Together, the two policies increase opex for businesses. To remain competitive and profitable, businesses will definitely find other ways to lower expenses. While the aim of the NIC and NLW is to protect the interests of workers, they might actually have the opposite effect. That’s the case with most government policies. During times when there already is so much uncertainty, can the UK afford to put further pressure on economic growth?