If one looked solely at this week’s trading reports from the world of big retail – the likes of Marks & Spencer, Next and Tesco – you might wonder why Rachel Reeves’ increase in employers’ national insurance contributions (NICs) has caused such a fuss. It is obvious from the trio’s outlook statements that they will cope with the extra costs.
At Tesco, which faces a £250m extra from NICs and other budget changes, the chief executive, Ken Murphy, did not rule out price rises but said the group would do its “very best” to mitigate them; and, given Tesco’s expertise in grinding out efficiency gains, you would bet on it to succeed. In similar style, Stuart Machin at M&S noted the cost headwinds but said “there is much within our control”.
At Next, Simon Wolfson gave thanks for zero inflation in the cost of goods it buys, mainly from Asia, and reckoned the clothing group could off-set the wage pressures with price rises of only 1%, or half the Bank of England’s target rate of inflation. So it is possible to shrug and say a hard-pressed Labour chancellor had to raise taxes somewhere and going after employer NICs was as good a place to start as any.
The problem with that semi-cheerful view, though, is that it misses critical nuances. Most obviously, M&S, Next and Tesco are not typical. Smaller retailers don’t have the same resources to invest in automation. Over in the pubs and restaurants sector, where labour costs are a bigger portion of the overall base, employers have fewer choices. Next can install automated tills in stores, but the local boozer cannot ask punters to pour their own pints.
Second, the controversial change in employee NICsupdate was not the increase in the rate from 13.8% to 15% from April. It was the lowering of the earnings threshold at which the tax applies from £9,100 a year to £5,000, which, as Wolfson pointed out, “creates a disproportionate increase in the cost of part-time work in stores”.
The effect will be a preference for full-time workers over part-timers, which obviously does not help the latter. Alternatively, employers may try to trim part-timers’ hours, increasing income and job insecurity at the bottom end of the earnings ladder. Nobody – not employers, nor employees – knows precisely how this threshold change will play out in practice, but the risk in a sudden adjustment is overreaction. As argued here previously, a phased introduction of the lower earnings threshold would have been a smarter piece of policymaking.
Third, the omission from November’s budget was off-setting growth measures for retail and hospitality. Planned changes to business rates seem to have descended into a bitter lobbying quarrel in which big-store retailers fear they will be taxed more heavily as if they are operating warehouses, which was surely not the intention if the aim is to sustain high streets and ensure anchor tenants do not go the way of department stores.
Machin said: “We would love to see a growth plan for the country and a growth plan on how to help business.” Fair comment. The NICs increase from April will land squarely in what can be loosely called “the real economy” of shops and hospitality just at a moment when growth is weakening and this week’s turmoil in the bond markets has given consumers and low-income workers more reasons to worry.
To repeat: the reliably profitable big retailers can adapt to almost any climate, and will do so again. But the size and pace of the NICs changes, given the likely impact on part-time workers, looks a mistake.
