The head of the UK Treasury admits that a rise in business taxes could lead to lower-than-expected wages

LONDON – The head of the British Treasury, Rachel Reeves, admitted on Thursday that wages could rise less than previously thought as a direct result of her budget decision to increase the taxes that companies pay for their employees.

On Wednesday, Reeves raised taxes by about 40 billion pounds ($52 billion) to end the tax cut hole it claims to have discovered in public finances and funding of cash-strapped public services, with a budget that could set the political tone for years to come.

The biggest measure – worth around £25 billion over five years – was an increase in national insurance contributions that employers pay in addition to their employees’ salaries. The levy, which was originally intended to pay for benefits and help finance state health care but is actually absorbed into overall tax revenues, will also be paid from a lower salary level.

Reeves admitted that the changes could encourage employers to pass on the additional financial burden by suppressing wages.

“I recognize there will be consequences,” Reeves told the BBC. “It will mean that companies will have to absorb some of this through profits and it will likely mean that wage increases will be slightly less than they would otherwise have been.”

Her admission came after a widely respected British economic think tank warned that lower-than-expected wages could mean taxes rise more than thought, adding that Reeves may have to raise taxes again in coming years to support public services.

In its traditional day-after assessment of the budget, the Institute for Fiscal Studies said some projections appeared “unrealistic”, especially on government spending.

The IFS said the government may have to raise a further £9 billion over the next year to avoid cuts to some departments.

Although daily spending is set to rise rapidly after Wednesday’s Budget, rising 4.3% this year and 2.6% next year, they will slow to just 1.3% per year from 2026.

IFS chief executive Paul Johnson said maintaining a 1.3% increase “will be extremely challenging, to say the least.”

The centre-left Labor Party won one landslide election victory After pledging to end years of unrest and scandal under successive Conservative governments, Britain’s economy is set to return to growth on July 4 and frayed public services will be restored. But the scale of the measures Reeves announced on Wednesday exceeded Labour’s cautious election campaign.

During the election, Labor said it would not increase taxes on ‘working people’ – a loose term whose definition has been hotly debated in the media for weeks. Although Reeves did not increase taxes on income or sales, the Conservatives said raising taxes on employers was contrary to Labor’s election promise and would lead to lower wages.