The UK's workforce may shrink by two million people if the government continues to rely on stealth taxes, a recent analysis has warned. This warning is particularly relevant for the country's employers, as it highlights the potential consequences of repeated tax rises on the economy. The analysis concludes that these tax increases are having a diminishing impact on revenue and are instead causing harm to the economy.
The impact of stealth taxes on small business owners is significant, as they are already struggling with recruitment. If income tax thresholds are not adjusted in line with earnings, two-thirds of all workers could become higher-rate taxpayers within a few decades. This would affect even those on the minimum wage, resulting in a significant decrease in the labor supply. In fact, it is estimated that labor supply could fall by around two million workers by 2075, making it unaffordable for people to work.
The mechanism behind this issue is well-known to SME employers. Freezing income tax thresholds in cash terms has already led to five million more people being pulled into higher and additional rate bands. As a result, millions of Britons, including nurses, teachers, and supermarket managers, are being pushed into higher tax brackets. This means that businesses will face increasing payroll costs as staff demand higher gross pay just to maintain their current standard of living.
Experts have warned that relying on stealth taxes may seem like an easy solution, but it has real consequences. The cost of these taxes is not just financial, but also affects people's willingness to work, stay in the UK, and save. The national debt is already close to £3tn, around 95 per cent of GDP, and further tax rises or spending cuts may be necessary to stabilize debt at current levels.
The tax burden is expected to reach a peacetime high of 38.5 per cent of GDP by the start of the next decade. Experts have cautioned that relying on further tax rises will lead to exponentially increasing pain, rather than just a slight increase. This leaves spending as a potential area for adjustment, with many pointing to the pension triple lock as a significant contributor to upward pressure on spending.
Some have suggested that linking the pension triple lock to inflation alone could save £160bn a year by 2075. However, this proposal is not without its challenges, and the issue of spending and taxation is complex. The message for SMEs, which employ most of the UK's private sector workforce, is clear: the era of quiet tax rises is ending, and the bill will have to be paid somehow.
