The National Insurance rise announced by Philip Hammond in the Budget on Wednesday is not going to happen. The only thing that saved the Chancellor from the embarrassment of the “U-turn” headlines was that the rise was planned for April next year. That means that there is plenty of time to obscure the climbdown behind a review of the jobs market in the autumn Budget.
Normally, after a Budget, MPs have to vote on the Finance Bill that puts the measures into law. Hence the humiliation of George Osborne last year, when he dropped the cut in disability benefits (or, more strictly, the cut in the planned increase) in the days between his Budget speech and the Finance Bill. Tory MPs were threatening to rebel, and Iain Duncan Smith resigned as Work and Pensions Secretary anyway.
There have been similar U-turns in the past. Gordon Brown had to send Alistair Darling, his Chancellor, to the Commons to announce a rise in the personal allowance in September, the middle of the tax year, in 2008. This was to head off a rebellion of Labour MPs against the abolition of the 10p income tax rate which Brown had announced as Chancellor the year before. The most celebrated case was in 1994, when Kenneth Clarke lost a vote to raise VAT on domestic energy. He had to put up taxes on cigarettes and alcohol instead.
Hammond’s retreat will avoid going down in history with these disasters because MPs don’t have to vote on the change yet – although there are already enough Tories prepared to rebel. The Chancellor has time to fix the U-turn so that it won’t look quite so U-shaped. More of a tangled knot by the time he has finished, I suspect.
But the fuss raises two questions. One is why Hammond announced it this month when there will be a second Budget in November before the change happens. The other is why he thought he could get away with breaking the manifesto pledge: “A Conservative government will not increase the rates of VAT, income tax or National Insurance in the next parliament.”
The first is easy enough to answer. Hammond wanted to announce extra spending on social care, to try to relieve some of the immediate pressure on the NHS, and he felt it important to show that he was raising money at the same time. When I say, “at the same time”, I mean he wanted to make the announcements at the same time, because in fact he will be spending the money before he raises it. He is Chancellor of the Exchequer, after all. But announcing them at the same time makes an important political point, not just to the country but to the Prime Minister: spending public money is easy; raising it is hard. A source “close to Hammond” told the Telegraph: “There is real frustration in the Treasury about this. No 10 want the spending but they aren’t prepared to stand up for the decisions that have to be taken to pay for it.”
The mystery, though, is why Hammond – and Theresa May, who was fully consulted – thought it was all right to break a manifesto promise. Perhaps they thought, because it is true, that it was a sensible change to reduce the tax advantage of self-employment. (Yes, they know that the self-employed don’t get sick leave and so on, but the advantage was about to increase.) Perhaps they thought that no one would therefore hold them to a “silly pledge” (Paul Johnson, Institute for Fiscal Studies) that the fools Cameron and Osborne should never have made. This is not how politics works.
One of the Prime Minister’s big things is that she does what she says she will do. This includes not having an early election in which she could make her own pledges. In which case she has to keep the pledges on which she stood in 2015. She and Hammond might say, “But we broke a more important promise to achieve a budget surplus by the end of the parliament.” Again, that is not how politics works. You are allowed to break “silly pledges” by spending more or taxing less. You are not allowed to break them by taxing more.
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There will be a fudge, therefore. We can guess roughly what it will be. On Wednesday Hammond set out changes to self-employed National Insurance contributions that would raise a net £215m in the year before the 2020 election. In the national finances, this is a trivial sum. What is likely to happen in the autumn Budget, then, is that this will be reduced to zero.
Then the Chancellor can say he hasn’t “raised” National Insurance. If he restructures Class 2 and Class 4 contributions (to recoup the cost of abolishing Class 2, which Osborne announced last year) he could even avoid raising the Class 4 rate, which is also covered by the manifesto promise. This could be part of a wider change, giving the self-employed more legal rights, or even merging income tax and National Insurance.
Spreadsheet Phil joked in his Budget speech that Norman Lamont was sacked 10 weeks after delivering what was also billed as “the last spring Budget” in 1993, in which he raised taxes in breach of an election promise. Hammond has time to put right the same mistake, so he will, I expect, last longer than the middle of May.