Reeves’ tax rise to push up inflation, BoE’s Megan Greene warns
Rachel Reeves’ national insurance tax rise will push up inflation and lead to a “shake-up” of the labour market, Bank of England rate-setter Megan Greene has warned.
In an interview with Bloomberg Television, Greene said she was particularly concerned about “weakness in output” for the best part of a year as she suggested Reeves’ tax rises could exacerbate the UK’s weak jobs market.
The Chancellor’s £25bn hike to employers’ national insurance contributions (NICs) and adjustment of the national living wage would lead to a squeezing of firms’ incomes and a downturn in hiring.
“[Firms] could decrease employment, decrease hours, offer lower wage increases, you could have [NICs] eat into profits,” Greene said.
“When we ask firms how they are responding, they basically say yes, we are going to do those [adjustments]. So far, it seems eating into profits will be the most immediate one.
“Further down the line it could feed into labour quantities, and that’s a concern of ours.
“The big risk is that there could be a big shakeout in the labour market. We could see unemployment take up. There are no signs of that yet.”
Reeves has not backed down on her £25bn hike to NICs despite warnings from industry bodies that costs would be passed onto consumers.
Greene, who is an external member to the Monetary Policy Committee (MPC), said that the Bank of England projects the hikes to the national living wage and NICs to push up inflation by around 0.2 per cent.
The effect of an ongoing global trade war on UK inflation appeared to be less clear, according to Greene, though she said that tariffs could “represent more of a disinflationary risk than an inflationary risk”.
She claimed that President Donald Trump’s tariffs made forecasters’ jobs more “difficult” ahead of the MPC’s next interest rates decision in early May.
“When it comes to tariffs, there are both inflationary and disinflationary impulses,” Greene said.
“If you have export substitution then that would tend to push down on growth and inflation. If you have trade diversion from other countries that are trying to find a new home for their markets, that also pushes down on inflation.”
Greene added that a breakdown in trade could lead to a spike in prices while changes in the price of the pound against the dollar and euro were still ongoing.
“We saw during the pandemic that when you have a re-patterning of supply chains, it can push up inflation.
“It’s a bit too early to say where the dust will settle on currencies. Currency forecasters have the hardest job, second only to energy forecasters.”
Economists believe a trade deal with the US, which could be announced within weeks, with could weigh down on price growth. Reeves is travelling to Washington DC for meetings as part of a summit hosted by the International Monetary Fund (IMF).