On Wednesday, the chancellor announced in his Pre-Budget Report (PBR) that employers National Insurance Contributions (NICs) would increase by 1% in 201.
But the CIPD's chief economic adviser, John Philpott, said: "The hostile reaction of employers to the chancellor's announcement is understandable but only partly justified.
"It is simplistic to describe payroll taxes, such as employers' NICs, as a ‘tax on jobs'. The incidence of the tax ultimately falls on employees rather than employers because employers will shift the tax onto employees by way of lower pay increases. The tax will therefore have a neutral effect on the cost of employment and should not harm employment.
"This does not, however, mean that raising employers NICs by 1% in 2011 is a good idea."
According to the CIPD, shifting the tax onto employees is neither automatic nor easy, especially following a prolonged period of modest pay growth and at the same time as employees earning more than £20,000 per year will themselves be hit by an increase in their own NICs at the same time.
It is therefore likely that the increase in employers' NICS will result in a temporary rise in wage costs and stymie growth in employment at what may still be a fragile stage in the economic recovery. Moreover, against a background of modest growth in real earnings, the increase in employee NICs will itself have a dampening effect on overall spending and demand for labour in the economy.
Philpott added: "In defending the hike in NICs, Government ministers appear sanguine about the overall impact given that the Treasury is forecasting the economy will be growing well above trend from 2011 onwards. Aside from the possibility that this might prove to be a heroic assumption, it also assumes that employers and employees will not anticipate the impending increase in NICs and alter their hiring, redundancy and spending plans in 2010. If so, the chancellor's announcement on NICs could harm what is anyway likely to be a ‘jobs light' recovery.
"While the chancellor has shown that he recognises the short-run risk to jobs from cutting the fiscal deficit too quickly, he seems to have underplayed the risk associated with his planned rise in NICs. It would be better to abandon the rise in NICs and instead seek savings from 2011 onward by deeper cuts in public spending than indicated yesterday, a two-year freeze in the public-sector pay bill rather than a 1% cap on public-sector pay rises, and a increase in green taxation which would carry less risk to job creation."
