Rachel Reeves’ tax raid leads to thousands of job losses as wage growth cools
Thousands of jobs were lost in June, official data has shown, putting the Bank of England under greater pressure to deal with the consequences of Chancellor Rachel Reeves’ £20bn tax raid at its next interest rates decision in August.
Bank Governor Andrew Bailey has warned that “softening” in the labour market could force rate-setters to make deeper cuts than expected, with a rise in employers’ national insurance contributions (NICs) forcing firms to feed through price rises to consumers.
The estimate of employees on the payroll dropped by around 41,000 in June while the unemployment rate grew to 4.7 per cent, a four-year high.
In the year to June, some 178,000 people were pushed out of work.
The unemployment rate just two months ago was 4.4 per cent.
The ONS also estimated that the number of vacancies in the UK fell by 56,000 in three months to 727,000, the 36th consecutive period where vacancy numbers have fallen.
Vacancies dropped in 14 of the 18 industry sectors, which suggests businesses have “curtailed hiring plans” according to Capital Economics’ Paul Dales.
“Yesterday’s inflation release [showing a 3.6 per cent year-on-year rise in prices] provided some evidence that businesses are responding to higher NICs and the minimum wage by raising their selling prices. But the bigger response appears to be the reduction in headcounts, which should eventually weigh on inflation,” Dales said.
Matthew Elliott, president and founder of the Jobs Foundation, said the latest drop showed the UK was in the middle of a “serious jobs recession”.
“The steepest fall in employment since the pandemic is a serious wake up call to the government,” he said.
“The hike to employer NICs has had the predicted damaging impact on jobs, and businesses are now worrying about further tax rises to come in the Autumn Budget.”
In figures that are likely to be closely watched by markets and Bank officials, the ONS revised its drop in company payrolls for May from 109,000 to 25,000.
ONS director of economic statistics Liz McKeown said: “The labour market continues to weaken, with the number of employees on payroll falling again, though revised tax data shows the decline in recent months is less pronounced than previously estimated.
Wage growth excluding bonuses dropped to five per cent in the three months to May, with last month’s figures showing the rise in average earnings had been 5.2 per cent.
Wage growth including bonuses was also five per cent in the latest release.
City forecasters polled by Bloomberg suggested wage growth would be 4.9 per cent.
Bank weighs job losses and high inflation
Fresh jobs data published by the Office for National Statistics has left the Bank in a difficult place given inflation hit 3.6 per cent in the year to June.
Whereas Bank officials worried about pay increases being too high after the last monetary policy report was published in May, rate-setters have turned to monitoring the risk of “slack” in the labour market dampening demand.
Yael Selfin, chief economist at KPMG, said the slowing activity in the labour market will prompt will likely lead to another interest rate cut next month.
“With domestic activity remaining sluggish, the MPC will likely want to provide support via looser policy to prevent a more significant deterioration in the labour market.”
Markets widely predict the Bank to cut interest rates by 25 basis points at the next decision in August after Bank Rate was held at 4.25 per cent in June.
The majority of Monetary Policy Committee (MPC) members agreed that the risks to inflation remained despite three rate-setters, including deputy governor Dave Ramsden, voting for a 25 basis point cut.
Economists are split, however, on how far the Bank is willing to go in cutting rates over subsequent meetings, with the mix of job cuts and high inflation posing a challenge to Bank officials.
Pantheon Macroeconomics analysis suggests only one interest rate cut is to come in the next 12 months due to the stickiness of inflation.
Rival consultancy Capital Economics, meanwhile, project interest rates to drop to as low as three per cent by the end of 2026.