Rachel Reeves's £25bn gamble to fix Britain

Telegraph

15-02-2025

Itsu's maki-making robots are able to churn out almost 5,000 sushi pieces every single hour.
Julian Metcalfe, the founder of the Asian takeaway chain, says the machines help his company do more with less at dozens of its sites across the UK.
'We remove repetitive, unskilled, boring jobs so we can invest more money paying trained team members to do high-quality, fresh food preparation on site,' he says.
Rachel Reeves wants more bosses to be like Metcalfe, investing in a way that creates a higher-skilled, more productive economy.
The problem is, she has also just hit them with a £25bn tax raid that will reduce investment and, in the worst cases, lead to big job losses.
'Generally speaking, there is no doubt the ever-increasing costs of employing staff in the hospitality business – made worse by the recent National Insurance hikes – will reduce the likelihood of new hires being taken on, reduce opportunity and jobs, as well as raising prices for customers,' says Metcalfe.
That may sound devastating for the economy – but could it be part of the Chancellor's grand plan?
There is some speculation that the Chancellor is secretly hoping her £25bn tax raid will push companies to invest more in technology and training rather than simply relying on low-cost, low-skilled workers. Higher investment will in turn boost productivity.
Higher productivity, which has been elusive since the financial crisis, is the key to unlocking higher living standards. When productivity improves, so do company profits and staff wages. This leads to stronger growth, a bigger economy, rising tax revenues and smaller borrowing bills.
The Office for Budget Responsibility (OBR), the Government's tax and spending watchdog, estimates that improving annual productivity growth by 0.5pc will reduce borrowing by more than £40bn by 2028-29 – the exact same number as Reeves's record tax raid.
One of Reeves's own advisers, the economist John Van Reenen, has suggested that a reliance on cheap labour is to blame for Britain's economic crisis.
Making labour more expensive may, therefore, be one way to fix the problem. The cost of employing someone on the minimum wage is set to rise above £24,000 this year once you take into account the rise in National Insurance.
Investing in things like machinery and software can help to boost the productivity of individual workers. The maki-making robots, for example, leave Itsu's workers with more time to serve customers.
Not only could higher business investment boost the economy, it could also help wean Britain off a reliance on overseas workers to fill gaps in the jobs market.
If this is part of the Chancellor's logic, it is a high-risk gamble. The tax raid is expected to trigger potentially thousands of job losses. It could also end up leaving many unskilled workers on the scrap heap.
Most economists will tell you that a bit of creative destruction is good for the economy. However, there are winners and losers.
Kate Nicholls, boss of industry body UKHospitality, says: 'I think there was a justification to invest in productivity improvements and make the businesses more productive, but in sectors like hospitality that rely upon service and people, that seems very difficult to achieve.'
Nicholls argues that trying to force change by raising National Insurance is 'regressive and disproportionately impacts the very sectors who cannot make the most of those kind of changes'.
'I can see how it works – make it more expensive to employ someone in a factory or an office and automate it and make the job more productive and the factory more productive – but I don't see how that works in hospitality,' she says.
'You can automate the ordering, the labour scheduling to free up some of the staff to do front line service rather than running between the two. But ultimately you can't take away service.'
Greg Thwaites, of the Resolution Foundation, a think tank, rejects the argument that Reeves had a hidden agenda to trigger creative destruction with her Budget.
'I think that they basically needed to raise a lot of money, and they wanted to be able to say with a straight-ish face that they'd done that without raising taxes on working people,' he says.
However, he says change is needed, even though it will involve job losses.
In a recent report, the think tank said: 'If some sectors grow, others will have to shrink. Hospitality represents a higher share of consumption in the UK than anywhere else in Europe, because it is relatively cheap.
'Improving conditions for workers in this and other lower productivity sectors will over time change that. Better pay for low-earners in hospitality, paid for by higher prices that most affect better-off households, will create a more equal UK.'
Ashwin Kumar, of the Institute of Public Policy Research (IPPR), says: 'The UK does have a problem with too many low-paid staff not having opportunities for progression or any functional training beyond health and safety and induction.'
Many part-time workers have been left to languish on the sidelines because of the types of jobs that usually offer shorter hours.
'It means that lots and lots of women essentially who have to work part time are basically trading down in terms of the jobs they do,' Kumar says. 'And that's manifestly a waste of our productivity.'
Productivity improvements may also – eventually – help to reduce Britain's reliance on migration.
Growth in employment within the health and social sectors, hotels and retail has almost all been entirely driven by non-EU born workers in recent years. The Office for National Statistics (ONS) expects migration to drive all of Britain's population growth for years to come.
'There are stories about people using agencies to recruit from overseas because it's convenient for them,' Kumar says.
'I think if we get to a position where employers end up having a more sustained commitment to staff, like banning zero-hours contracts, it will be a positive signal for who it's worth recruiting.
'Because if companies are nudged to invest more in their people, they are going to want people who are also going to have more of a commitment to staying around.'
Not everyone agrees.
Many business leaders warn that the pledge by Angela Rayner, the Deputy Prime Minister, to strengthen workers' rights will discourage companies from taking a chance on workers who are young or with fewer skills – the very people that Reeves says she wants to help get back into work.
There is also the big question about how far we can automate. Metcalfe recently said he was reversing some of Itsu's use of robots.
'It's a question of balance,' he says. 'I think some business will over-automate and lose customers.
'The harmony between good value for money, quality handmade food and the use of modern technology is elusive. No humans should ever be left on any scrap heap. What a depressing thought.'