More than a u-turn. Why Philip Hammond's reversal on National Insurance matters
It is difficult to know where to begin. There is nothing new about u-turns from Chancellors – Lord knows George Osborne did enough of them.
But Philip Hammond’s volte face on National Insurance must surely go down as one of the most screeching and humiliating in years.
Mr Osborne took two months to reverse his notorious pasty tax. Mr Hammond has taken less than a week.
There are a few obvious lessons. The first is that the Treasury is clearly weaker than it has been in decades. Under Gordon Brown and Mr Osborne, it was the powerhouse department no-one else could argue with – including, sometimes, the Prime Minister. No longer.
The Chancellor was very invested in the plan to raise national insurance rates for the self-employed – as was his department; he spent the day after the Budget defending the policy vigorously. He disputed claims that it broke the Tories’ manifesto pledge not to raise main tax rates. Indeed, in the last couple of days it seemed increasingly that he had managed to ride out the choppy waters: the headlines in recent days have been dominated by Scotland and Brexit.
But it is clear, now, that he has been overruled by Number 10. Which raises a big question: given there is so much tricky economic policy that will need to happen in the next few years – on reforming the tax system, on changing planning laws, on throwing out long-standing EU regulations – how on earth will the Treasury be able to push it through?
The NICs change was undoubtedly controversial: some self-employed workers would have paid considerably more. But it was as nothing compared with the furore that will ensue if the Government considers anything that will equalise the intergenerational divide. It is tiny in comparison with the political impact of trying to dismantle planning restrictions over the green belt or reverse popular labour market regulations.
In short, any hopes economists had that this Chancellor would be a great reformer seem to have been quashed in one fell swoop.
Another broader lesson is that the Government’s wafer thin majority in Parliament means any contentious fiscal decisions are going to be very difficult to push through. This u-turn was largely driven by Conservative backbenchers, who were fighting the reforms. Their victory will only make their voices louder in the future.
To take this case alone: abolishing the NICs increase means the Budget will have a £1 billion hole in this parliament – potentially £2bn over the next five years. That hole will need to be made good – either through other spending cuts or tax rises, or more borrowing. Now, as it happens, the Government could comfortably borrow more without breaking its rules – indeed, as I pointed out on Budget day, the intriguing thing about the NICs change was that in purely fiscal terms (eg to make his sums add up) the Chancellor didn’t really need to do it.
But, again, the issue is more the precedent it sets.
Finally, there’s the question of what this u-turn does to the structure of the UK economy – and here there are at least two concerns. One is that the NICs increase was there for a reason (beyond raising money). There is a major tax incentive for anyone wanting to be self-employed. Some degree of incentive is fair enough, but most economists argue that in the UK’s case the balance is skewed too far in the direction of self-employment. That helps explain why self-employment rates have gone through the roof here compared with most other nations. The Government has commissioned an independent review on this and other gig economy related issues from RSA chief Matthew Taylor, so its publication may prompt more reforms. But given what happened today, you’d have to append a lower probability to any of those recommendations actually happening.
Then there’s the impact on inequality. The NICs change was the most progressive policy in the Budget – in other words, it took most from the richest and least from the poorest. Its absence will, all else equal, mean the UK is more unequal than would have been the case with the NICs increase. Given that by some measures this Government is already raising inequality more than any other for decades, that’s not a trivial concern.
The very final lesson (perhaps the most important of all) is that politicians should make silly promises at their peril. In the end, this comes back to the pre-election Conservative pledge not to raise the main rates of tax. That was always a preposterous promise – just like George Osborne’s surplus target and David Cameron/Theresa May’s vow to get net immigration down to the tens of thousands.
Such pledges might help you win an election. But they’re even more likely to help you lose the next one.