Rachel Reeves’ £25 billion national insurance raid has contributed to sluggish growth and pushed up food prices, the Bank of England said.
The Chancellor put up employers’ contributions in her first budget, with the increases coming into effect in April this year.
Increased national insurance contributions (Nics) and uncertainty caused by the tax rise have “weighed on growth”, according to businesses, the bank’s latest monetary policy report said.
The report also noted that higher labour costs are contributing to food price inflation, partly because of increases in minimum wages and the impact of the increase in Nics.
A “relatively high proportion of staff” in food manufacturing and retail are paid at or close to the national living wage, which increased by 6.7% in April.
“Furthermore, overall labour costs of supermarkets are likely to have been disproportionately affected by the lower threshold at which employers start paying Nics, in part because a relatively high proportion of supermarket staff is employed part-time,” the report said.
Most of the wage costs, but only part of the Nics increase so far, have been passed on to consumers, putting up prices by about 1% to 2%, with consumers facing further increases in the second half of 2025.
Food prices in shops are forecast to be 5% higher in the autumn than they were a year ago.
Helen Dickinson, chief executive at the British Retail Consortium, said: “Government policy will add £7 billion to retailer costs this year, from higher employment costs to the introduction of a new packaging tax.
“Food prices have already been climbing steadily, and the BRC has warned this is only the beginning.
“If the autumn budget once again lands on the shoulders of retailers, then it will only serve to fan the flames of food inflation, with poorer families being hit the hardest by the Treasury’s decisions.”
A summary of economic intelligence from the Bank’s agents, who have confidential conversations with business chiefs around the country, suggested other government policies were also causing concerns.
Firms indicated investment was being withheld or delayed because of uncertainty related to weak demand, tax, regulation and wider government policy, including Deputy Prime Minister Angela Rayner’s Employment Rights Bill.
A combination of Nics and the legislation to increase workers’ rights are hitting the labour market, the report said.
Higher costs related to Nics have already had an impact and “new employment rights legislation may dampen labour demand further”.
The Bank reduced interest rates to 4% from 4.25% and raised its economic growth forecast for this year, predicting that GDP (gross domestic product) will grow by 1.25% in 2025, up from its previous estimate of 1%.
The Chancellor said the rate cut was partly down to Labour’s stewardship of the economy.
It was “good news for homeowners, good news for businesses”, she said.
“Interest rates have now come down five times since Labour came into office, in part because of the stability that we’ve managed to return to the economy after the chopping and changing, the mini-budget under the Conservatives and (former prime minister) Liz Truss.”
But she faces another difficult set of choices in her budget this autumn, with the Bank’s growth forecasts well below those from the Office for Budget Responsibility.
James Smith, research director at the Resolution Foundation economic think tank, said: “There was bad news for the Chancellor from the Bank of England today as its forecasts remain more pessimistic on growth than the Office for Budget Responsibility, suggesting bad news is coming at the autumn budget.
“Bank rate is now 4% – its lowest level since March 2023. While this will be broadly welcomed by mortgagors, around 700,000 families will still see repayments rise as they come off five-year fixed-rate deals.
“There was also bad news from the Bank of England for families struggling with the cost of living: inflation is set to be higher than previously expected, with food inflation rising further in the coming months, and real wage growth set to hit a brick wall this year.”
