The £1bn cost of the National Insurance raid that Reeves ignored

Telegraph

4 hours ago

Rachel Reeves's National Insurance tax grab has left councils facing a seven-figure shortfall with more at risk of bankruptcy, MPs have warned.
The Chancellor raised employer contributions to 15pc during her Budget, but a Public Accounts Committee (PAC) report on Wednesday said ministers had failed to properly assess another £1.1bn of potential costs.
MPs said the Government had not carried out an assessment of the true costs, and demanded it review the short- and long-term impact on providing services.
Councils are now facing the risk of private providers passing on their increased costs and handing back social care contracts they can no longer afford to deliver, it said.
The report added that local government finance was in a 'perilous state', with budget deficits putting many councils at risk of effectively going bankrupt.
The Local Government Association (LGA), which represents councils, has already warned that more than half of councils are on course for insolvency next year.
The National Insurance contribution rate for employers rose from 13.8pc to 15pc in April following changes in October's Budget. The salary threshold also dropped from £9,100 to £5,000, as the Government tried to raise tax for public spending.
Ministers set aside £4.7bn to support the public sector, including £502m for councils to cover increases in their direct employment costs.
However, the LGA calculated the actual cost to be £637m. It also warned of £1.1bn in extra costs for councils passed on by service providers they had commissioned.
The PAC report said: 'Some local authorities may be able to provide financial support to service providers for these increases in costs, but it is unacceptable that the Ministry of Housing, Communities and Local Government and HM Treasury have not assessed how much impact this could have on local authorities.'
It added: 'Spending on special educational needs and disabilities (Send) has outstripped the money available from the Department for Education to pay for it. Local authority deficits from these overspends are expected to be between £2.9bn and £3.9bn a year by the end of 2027–28.
'The mechanism which allows local authorities to keep these deficits off their books is due to run out in March 2026, and without it, many local authorities are at risk of effectively going bankrupt.'
The charity, Mencap, which supports more than 4,000 people with learning difficulties, also told the committee it could be forced to hand back social care contracts after a potential £18m annual increase in costs due to National Insurance and national living wage rises.
It comes as council tax is expected to rise again to fund major commitments announced earlier this month in Ms Reeves's first spending review.
Rates are already at record levels, with nine in 10 areas across England enduring the maximum 4.99pc council tax rise this year, and parts of Scotland and Wales slapped with even higher increases.
A spokesman for the County Councils Network, which represents local authorities, said the Government's compensation covered less than half of the increased costs in National Insurance.
He said: 'This year, county and unitary councils are having to make an unprecedented £1.2bn in savings due to rising demand for services, compounded by recent government decisions. One of those was the decision to raise employers' National Insurance contributions, which has adversely impacted on councils.
'Our recent survey found that the Government's compensation covered just 40pc of the costs of this policy for county and unitary councils this year, meaning they will have to make up the shortfall through service reductions and other efficiencies.'
Councillor Louise Gittins, chairman of the LGA, said the spending review had left councils under continued financial pressure.
She said: 'Many will continue to have to increase council tax bills to try and protect services, but still need to make further cutbacks. While the Government faced tough choices, future funding for adult social care is good news but a lack of significant extra government money needed to meet immediate pressures is worrying.'
Jim McMahon, of the Ministry of Housing, said the PAC's claims were not supported by the evidence.
He said: 'The spending review provided over £5bn of new grant funding for local services, and that's on top of the £69bn we have already injected this year to boost council finances.
'The results speak for themselves. Over 95pc of audited accounts were submitted for the deadline we set, no S114 were issued by councils as a result of financial distress, and claims against Exceptional Financial Support were £1bn less than the previous year.'