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The IFS throws Philip Hammond a lifeline – will he take it?

9 March 2017

3:44 PM

9 March 2017

3:44 PM

As Philip Hammond faces a slew of negative headlines and fields accusations that he is a liar over his decision to backtrack on a 2015 Tory manifesto pledge and raise National Insurance for the self-employed, the Chancellor has been thrown a lifeline by the Institute of Fiscal Studies. At today’s IFS Budget briefing, Paul Johnson offered his verdict on Hammond’s first Budget. While he raised concerns about the government’s sluggish plan to balance the books (warning that it could be delayed past 2025), he welcomed the controversial NIC raise as ‘baby steps in the right direction’:

‘A tax system which charges thousands of pounds more in tax for employees doing the same job as someone else needs reform. It distorts decisions, creates complexity and is unfair. The incentives for companies to claim that people who work for them are self employed rather than employees are huge.’

Hammond has been criticised over the policy on two points. Firstly that the tax punishes the self-employed who are not entitled to the same privileges as employees — and therefore ought not to pay as much tax. However, Johnson and his team say that the rights are now so similar that there ought to be a similar tax rate. Since April 2016, both accrue the same rights to state pensions and the only real differences come down to things like holiday pay and statutory parental benefits.

As for suggestions that the self-employed take a greater risk due to more job insecurity, the IFS say insecurity is not something that should be rewarded by merit as ‘there’s nothing inherently good about risk-taking’. What’s more, often this instability is reflected at source in the wages, with a freelance paid a higher rate than a staff member is. Company benefits, too, are a matter for the employer and employee — not the government.

 

No 10 have today refused to rule out a U-turn but the IFS say this would be a mistake. It’s not the money that is the issue. In terms of the Budget, it is small fry but Johnson says that the measure amounts to ‘putting a plug in the dyke as the water begins to flood through’. In the next 10 to 15 years, the self-employed workforce will expand considerably and so there needs to be a plan in place to account for this in the future.

The other reason many — including Tory MPs — are so angry about the measure is that it breaks a manifesto pledge. The Tories promised not to raise National Insurance for five years, and while the legislation may have specified that they meant Class 1, this was not in the manifesto. So, where does the fault lie? Johnson says the blame is with the Cameron government and politicians in general for making ‘silly manifesto pledges’:

‘If politicians continue to make silly manifesto pledges about not changing taxes and the rest of us resist sensible changes such as this we will end up with the tax system we deserve – inefficient, inequitable, complex and increasingly unable to raise revenue in the face of a changing economy.’

Whether or not you agree with the measure, it’s hard to dispute this point. Cameron’s former No 10 Head of Strategy Ameet Gill is on the record as saying that the only reason they came up with the five-year freeze was to fill a ‘hole in the grid’ — branding it as ‘probably the dumbest economic policy that anyone could make’. Ed Vaizey, a minister in the Cameron government, told me today at the Bright Blue Budget briefing that Gill ‘makes a very good point’ as ‘there is too much policy driven by the need to make endless news announcements’.

While it’s valid to question the merits of raising National Insurance rates for the self-employed, there must also be a discussion on whether breaking a manifesto pledge that even its creators have criticised is necessarily a bad thing. But this is not the argument Hammond has put forward — he claims that he is technically complying with the pledge as the legislation only protected Class 1 contributions. This argument doesn’t hold water. If Hammond thinks that the manifesto promise was foolish, he should say so rather than hiding behind the idea that he’s technically complying with it.


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