Philip Hammond unveiled controversial tax rises in the Budget speech – but are they the real issue?
At 12:37 pm last Wednesday Philip Hammond, the new Chancellor of the Exchequer, rose to deliver his first Budget speech. It was also going to be the last Spring Budget: starting in November, the Budget will move to the Autumn, in order to give more time for legislation to be implemented before the start of the tax year in the following April.
Hammond started with a sip of water – how politically incorrect would it be for a Chancellor to revive the old habit of drinking brandy as he delivered his speech? Then he reeled off the good news on the economy: growth forecasts were up, borrowing was down and the Government’s “plan was working.”
In truth, the Budget speech was light on detail and strong on intention. As we wrote recently, 2017 will be a significant year, with elections in Holland, France and Germany and Donald Trump newly installed in the White House. By the time Hammond delivers his Autumn Budget, he will know the result of those elections and the likely future shape of the EU, he will know if the Greek economy has staggered through another year, he will know what impact Trump’s “radically different” tax plans have made – and he will know how the Brexit negotiations are proceeding.
He spoke for an hour, made some good jokes and when he sat down must have been thoroughly pleased with himself. He may even have glanced sideways at Theresa May and concluded that in the event of the mythical fall-under-the-bus Mrs Hammond would be odds-on to be measuring up for new curtains in 10 Downing Street.
A nightcap, a good night’s sleep – and then he awoke to the full horror of Thursday morning’s papers…
‘Hammond breaks election pledges,’ said the Telegraph. ‘Hammond raids the self-employed to fund care,’ declared the i newspaper. The tabloids were significantly more direct: ‘Spite van man’ screamed the Sun. ‘Rob the Builder’ was the headline splashed across the Star. The Spectator was even harsher, simply labelling the Budget a ‘disaster.’
Hammond’s crime? He had allocated money to fund social care – £2bn over the next three years – and one of the ways he planned to fund it was by raising the Class 4 National Insurance contributions paid by the 15% of the UK workforce who are self-employed.
What are Class 4 contributions?
Class 4 contributions are levied on profits above £8,600 a year, up to profits of £43,000. Currently, they are paid at a rate of 9%, but this will now rise to 10% in April 2018 and 11% in April 2019. The Chancellor said that it would raise £145m by 2021/22 at an average cost to those affected of 60p a week, and he justified the move on the grounds of ‘fairness’ – a theme that ran through both the Autumn Statement and this Budget speech.
The reaction to the increases
The papers and the Tory backbenchers were having none of it: as we’ve seen the newspapers were united in the condemnation, and by Thursday morning 10 Tory MPs had already gone on record as opposing the National Insurance increases, with Anne-Marie Trevelyan, the MP for Berwick-upon-Tweed, saying
“it goes against every principle of Conservative understanding of business.”
The annoyance was understandable: Hammond was accused of breaking David Cameron’s ‘5 Year tax lock’ – no increase in income tax rates; no increase in VAT and no increase in national insurance. Suddenly the Conservatives were no longer seen as the ‘low tax’ party.
…And there was also criticism levelled at the impact the increase will have on women – there are 1.6m self-employed women in the UK, who very often use their earnings to fund child care costs.
By Friday morning, ten Tory MPs had become 100 – with the Prime Minister under real pressure to reverse the NIC increases. But is this just a spat among the Conservative party and its supporters on Fleet Street? No, it isn’t: the Budget speech was an indication of things to come, and it has implications for all of us.
The Budget: The broader picture – and the future
Philip Hammond is a cautious man: he knows that he has significant spending commitments to come – whether that is funding social care, re-shaping education or building a ‘Brexit war chest – and he does not want to increase Government borrowing to pay for them. He made a point of stressing the UK’s debt in the Budget: it is £1.7tn on which the country pays £50bn of interest every year. As Hammond said, that interest is “more than we spend on defence and policing combined.”
If he won’t increase borrowing then that can only mean one thing: the money is going to come from you and me in increased taxes.
There’s no doubt that Philip Hammond badly misjudged the mood in both the country and the parliamentary party. He’s given the impression that the Government sees the self-employed not as creators of wealth and jobs, but as people who ‘play the system’ for their own benefit.
He may also have unleashed the law of unintended consequences. He wanted to raise more money by targeting the self-employed and small businesses. Instead, he’s created the impression that he’s targeting them – as the Spectator put it, ‘that he suspects them of being tax-dodgers, of using the NHS without paying for it.’ In doing that, he might well have given an unwitting boost to the black economy. White van man might decide to do even more work for cash – and the Chancellor might end up with lower tax receipts, and very expensive egg on his face.
But maybe we should say a word in defence of Philip Hammond. He warned that “the challenges in globalisation, shifts in demographics and the emergence of new technologies” has seen a huge – and rapid – changes in the labour market, which is robbing the Treasury of vital revenue. The number of people in self-employment is rising rapidly thanks to the gig economy – which we highlighted recently. Simply put, a 20th Century tax system is failing to cope with a 21st Century labour market, and taxes are becoming harder and harder to collect.
The increase in Class 4 contributions may have been badly handled, but it is a sign of things to come. We no longer work for one company for all of our lives: people change jobs more frequently: they have more than one job; they move in and out of self-employment. The workforce is changing, and our tax system is going to need to change with it.