Money Matters

The wrong U-turn, for the wrong reasons

March 20, 2017
By Web Desk

Theresa May’s government has made a bad mistake. Philip Hammond, chancellor, has dropped an increase in national insurance contributions for the self-employed, as proposed in the Spring Budget. This is a case of short-term expediency trumping long-term sensible policy.

Conservatives pride themselves on being the party of the entrepreneur. The tax increase appeared to send the opposite message, while breaking an electoral commitment to boot. The retreat, coming one week after the Budget, is one of the most abject in recent memory.

Raising Class 4 NICs by 2 per cent was a progressive measure that would have resulted in a fairer tax system, helping to raise a much-needed £2bn to plug glaring gaps in social care. 

This newspaper has argued that Mr Hammond’s mistake was not raising contributions, but rather failing to include the change in a wider package of reforms for self-employment - something that the government is now considering.

Mrs May has announced there will be no further changes to NICs until after the next general election, due in 2020. A serious problem has in effect been put on indefinite hold.

The danger now is that the Taylor Review into self-employment due this summer will suffer the same fate. Yet this same government had promoted the review as a comprehensive response to the shifting balance in the labour market, and the tax burden between the employed and self- employed.

Mr Hammond told the House of Commons that the change of course is because the proposed tax increase would breach the “spirit” of the Conservatives’ 2015 manifesto. In fact, it breached the exact wording. Mr Hammond, dubbed “Spreadsheet Phil”, was either ignorant of his own party’s manifesto commitment or insensitive to basic politics.

That said, promises sometimes have to be broken. Circumstances change, and the Brexit vote has forced the government to reset its fiscal framework. This should have been addressed directly and openly. It is regrettable that Mr Hammond’s credibility has been damaged. He remains the voice of reason in the Cabinet debate over the UK’s economic future after Brexit.

There are lessons here for the government. The first is that the prime minister and the chancellor must stick together. The signs are that Downing Street lost its nerve in the face of a potential backbench rebellion. That served only to add fuel to the fire of Tory discontent, which was in turn fanned by the popular press.

The second lesson comes down to discipline. If the Conservative party cannot stomach a modest taxation change such as this, how will it cope with the other policy challenges of the coming years? Demographic facts mean that on health, housing and education, spending demands are only going to increase. There is little fat left to cut.

Finally, the UK has yet to begin the process of leaving the EU, yet Brexit is already clogging the pipes of government. Once Article 50 is triggered, setting in motion the process of separation from the EU, Brexit risks overwhelming all domestic priorities. 

The NICs debacle illustrates the tension at the heart of the May government: it does not want to be defined by Brexit, but it does not have the courage to follow through a distinctive economic and social agenda independent of Brexit.

Mrs May should have backed the chancellor and stuck to her guns on the NIC changes. Both have been weakened by an unnecessary U-turn.