Rachel Reeves in new Bank of England blow as she hammers the middle classes

Rachel Reeves’ tax and wage policies are piling pressure on Britain’s middle classes, according to a Bank of England report.

It pointed to changes in the last Budget that are said to be driving up business costs, curbing pay rises, fuelling food price inflation and pushing jobs overseas.

The findings are based on interviews with hundreds of firms across the UK, which found evidence of higher prices, shrinking pay packets and a fresh wave of redundancies.

The findings come just months after the Chancellor unveiled a £26billion hike in payroll taxes, a sharp 6.7% rise in the National Living Wage, and a raft of green levies – all designed to help plug a gaping hole in the public finances and bankroll Labour’s £20billion infrastructure pledge.

But business leaders say the measures are having a chilling effect on wages and investment, with middle earners bearing the brunt of squeezed pay awards.

“The most common response is to reduce pay awards for those above the National Living Wage by 1–2 percentage points,” the Bank’s agents reported.

The move is said to be compressing pay differences between long-serving staff and new starters, eroding incentives and morale.

David Owen, chief economist at Saltmarsh Economics, told Bloomberg: “The agents’ report is counter to the belief that rises in the minimum wage would normally have some knock-on effect through the income distribution.”

Retailers warned the living wage hike and payroll tax increase alone will raise their wage bills by 10%, forcing many to cut headcount or shift jobs abroad. The report stated: “Large firms are offshoring more work, leading to redundancies in manufacturing and professional services.”

Tax records show 109,000 jobs were lost from company payrolls in May alone, taking the total number of post-Budget redundancies to over a quarter of a million. Pay growth in the private sector is also cooling more rapidly than the Bank had expected.

In response, Governor Andrew Bailey said there are signs of a “softening” in the jobs market, as he kept the door open to a possible interest rate cut in August.

The Bank’s findings will make troubling reading for the Labour leadership, with evidence that government policy is stoking food price inflation – already up 4.2 per cent in the past year. Experts warn this could embed expectations of future price rises and trigger inflationary wage demands.

Supermarkets, already grappling with rising costs, say they’re now facing a further £2bn burden from Extended Producer Responsibility regulations brought in this spring – making it harder to absorb new tax and wage pressures without passing them on to consumers.

Adding to concerns, the Bank said Reeves’ tax policies are contributing to “subdued investment intentions” as firms shy away from long-term spending amid mounting cost uncertainty.

Rachel Reeves points out that wages and pensions have risen faster than prices since Labour won the general election, putting more money in people's pockets. She also stresses that investment in public services, such as the NHS, is good for the public and businesses.

The Chancellor is banking on the Bank of England to cut the base rate in August in order to boost a consumer feel-good factor by reducing the cost of home loans and borrowing.