The Bank of England governor, Andrew Bailey, has said retailers are right to warn of potential job cuts as a result of tax increases announced at last month’s budget.
Bailey appeared before the cross-party Treasury select committee on Tuesday, after almost 80 retailers claimed rising costs would make “job losses inevitable, and higher prices a certainty”.
Rachel Reeves’s first budget increased taxes by £40bn, which Labour said would be used to fund creaking public services.
The biggest revenue-raiser was a £25bn rise in employer national insurance contributions (NICs), which has prompted a backlash from business groups.
In a letter to the chancellor, retail bosses claimed this and other changes would cost the sector £7bn and lead to layoffs. Signatories included senior figures from Tesco, Greggs, H&M, B&Q and Specsavers.
Asked about their warning, Bailey told MPs retailers were “right” to raise the issue. He added that depending on how companies respond, there could be a bigger reduction in employment as a result of the NICs rise than the 50,000 jobs projected by the government’s spending watchdog, the Office for Budget Responsibility (OBR).
“I think there is a risk here that the reduction in employment could be more. Yes, I think that’s a risk,” Bailey said.
Reeves and Keir Starmer have robustly defended the budget in the face of criticism from companies.
Bailey suggested the Bank’s monetary policy committee (MPC) would continue to reduce interest rates slowly from their current level of 4.75%, allowing time to assess the impact of the tax changes.
“A gradual approach to removing monetary policy restraint will help us to observe how this plays out, along with other risks to the inflation outlook,” the governor said.
However, Prof Alan Taylor, a fellow MPC member also appearing before the committee, suggested the MPC could make more than the four quarter-point rate cuts that financial markets are forecasting over the next year.
“If conditions are weaker, and my own view is skewed to the downside risks now versus the upside risk of a year ago, then we could go faster,” he told MPs.
The MPC cut rates to 4.75% earlier this month, the second reduction this year. Borrowing costs peaked at 5.25% last year as the Bank battled the sharp increase in inflation that followed Russia’s invasion of Ukraine and the unwinding of Covid shutdowns.
The OBR has suggested inflation is likely to be up to 0.5 percentage points higher over the next year as a result of budget policies, including higher public spending.
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The letter from retailers was coordinated by the British Retail Consortium (BRC). It warned that absorbing the impact of the higher costs would mean higher prices for consumers, smaller pay rises, job cuts and store closures.
“For any retailer, large or small, it will not be possible to absorb such significant cost increases over such a short timescale,” the letter said. “The effect will be to increase inflation, slow pay growth, cause shop closures and reduce jobs, especially at the entry level. This will impact high streets and customers right across the country.”
The letter said retailers were already starting to make “difficult decisions” and “the sheer scale of new costs and the speed with which they occur create a cumulative burden that will make job losses inevitable, and higher prices a certainty”.
The BRC estimates that retailers will face a £2.3bn bill from April, after the implementation of the increase in employer NICs from 13.8% to 15%, as well as the reduction in the earnings threshold when they must start paying it, from £9,100 to £5,000.
The NICs rise will come into force next April, alongside a significant increase in the national minimum wage, which retailers claim will cost them another £2.7bn.
Responding to the retailers’ letter, a Treasury spokesperson said: “With our public services crumbling and an inherited £22bn fiscal black hole from the previous government, we had to make difficult choices to fix the foundations of the country and restore desperately needed economic stability to allow businesses to thrive.
“By doing this, more than half of employers will either see a cut or no change in their national insurance bills, there will be £22.6bn more for the NHS and workers’ payslips will be protected from higher tax.”