National Insurance Increases
Chancellor of the Exchequer Phillip Hammond has performed a huge U-turn on his plans to increase national insurance contributions for the self-employed, after proposing them in his first budget only a week earlier.
The proposed increases would have meant self-employed people would have seen a yearly increase in their 9% national insurance payments so that by 2019 they would have been paying 11% on their earnings above £8,060.
The initial incentive of this rise was to create a ‘fairness’, as the Prime Minister Theresa May believes. Many in the Treasury believe that more people are entering into self-employment to lower their tax payments. Although how “fair” this would be is debatable, as the tax hike would have been significantly more noticeable to a self-employed person on a lower income than those of a higher. The average earning for the self-employed now is just £12,480 a year, showing many would have suffered extremely from these rises.
Budget goes bust
The rises formed the centrepiece of Hammond’s first budget and were met by massive backlash from both Labour MP’s and Tory backbenchers. This shows questionable authority in pressing forward on a controversial decision with a narrow parliamentary majority, and many questioned why the Chancellor and Prime Minister would show such support for the plan only to drop it, apparently at May’s request. It is believed that May thought the rises, which would have breached a significant manifesto pledge to not raise taxes, would prove to be too controversial and split the party’s and public’s opinions. For Ann-Marie Trevelyan, a backbench MP concerned on the NIC rises, the chancellor’s change of heart is like a breath of fresh air, as she told the Guardian: “My leaflets had ‘no tax rises’ on them. That’s political capital we would never get back, and we are the party of sensible taxation.”
Yet the effects of Hammond’s U-turn, on his own career and the Conservative Party’s image are relatively negative, as Shadow Chancellor John McDonnell said the Government had descended into “chaos”, and urged the Chancellor to apologise, stating “Nobody should be too arrogant to use the word ‘sorry’ when they blunder so disastrously.”
While Conservative MP’s who had opposed the policy showed support, with Stephen McPartland, MP for Stevenage, stating “I think it shows he is a strong Chancellor as he has listened to us and had the guts to accept he made a mistake.”, the overall effect of Hammond’s withdrawal leaves an unstable party, as one Tory MP stated: “The big thing it means is that if anything comes up that I don’t like then I’ll just go for it.”
No more cuts
With all of this in mind, not only is there a question of how the Conservative government will bounce back from such controversies, but also of where Hammond will now find £2bn to fill the hole made by his repeal of the tax rises. Many ministers are hoping there will be no more cuts to health and education, with spending per pupil estimated to fall to 6.5% by 2019-20 per the Institute for Fiscal Studies, and studies claiming that NHS and social care cuts may be the cause of 30,000 excess deaths in England and Wales through 2015.
There is serious talk around the possibility of Hammond setting his sights on tax relief on pension contributions. While this could possibly claw back most of the £2bn hole in his budget, those affected by the dipping would be core Conservative voters, as they could afford to pay the higher tax for their pensions, meaning it could be an increasingly controversial move for the Chancellor. However, as Baroness Altman, a leading pension expert, commented: “he does not have many options” left to him.