15 Mar 2017

Hammond’s U-turn: dangerous for economics and politics?  

Philip Hammond’s U-turn on National Insurance contributions for the self-employed is not just politically humbling for Number 11 but, critics charge, deeply worrying for the future of the public purse.

A lot of focus today will centre on the power grab by Number 10 which has forced the Chancellor into what appears to be a humiliating volte face.

The reason this is important is because for decades now the Treasury has been the powerbase of British politics. First, the Brown years and the Iron Grip. Then the unexpected moment when for a brief period not only was the Treasury running the UK Government but Alistair Darling seemed to be running the whole global recovery. Then we had the Osborne years – cementing the notion that Treasury held not just the keys to the coffers but also much of the decision-making power in government.

Today, that appears to be over.

The Treasury’s power has not just waned, it seems routed.

In his first ever Budget, the Chancellor’s one and only substantive policy change has been scrapped. He had in the hours and days afterwards staked a lot of his personal credibility to insist that the hike in National Insurance for the self-employed was not just good for the exchequer but also fundamentally fairer for society. It’s a big deal for a man whose reputation depended on his status as a safe pair of hands.

Philip Hammond Announces U-turn On National Insurance Budget Increase

Despite the angry headlines, he defended his decision the day after the Budget and denied the hike had been a breach of the manifesto pledge not to touch National Insurance.

These are tricky times for the UK and our economy remains fragile. Our deficit stands at £52bn and there is much more austerity coming down the track. Add into the mix, the management of Brexit and you have a difficult backdrop for the much-needed reform of the tax system, the funding of our so-called Industrial Strategy and our desperately needed Housing Policy.

Not to mention the genuine tax changes required to even out protections that favour the old (like the triple lock) at the expense of the young. Many will wonder how an apparently nobbled Number 11 would have the might to push through such thorny fiscal decisions?

But the slap down from Number 10 is also key because it raises questions about what the Government’s economic vision is beyond the soundbites – and with years of Brexit negotiations looming.

In his book Thank You For Being Late Tom Friedman talks about the necessity of having a clear view on “the system” – short hand for a coherent view of how the economy should be run. Theresa May talks about a fairer society but this ideal needs policy backing.

What has alarmed many is that the National Insurance change was the most progressive policy in the Budget – which means that it took the most from the richest and least from the poorest. It had the backing of most economists who highlighted the inequities being created by too many tax benefits being skewed to the self-employed.

In recent years, the fast growing ranks of the self-employed have become indispensable to the British economy with 40 percent of growth delivered by their hands. But while the mythical White Van Man is one of them, so too are barristers, doctors and many TV presenters – all of whom earn far in excess of the national average.

Reversing the NICs change not only creates a £1-2 billion hole in public finances but makes the budget more regressive at a time when inequality is a growing concern to many.

Paul Johnson, who heads the Institute for Fiscal Studies berated the government for making ill-advised promises in its manifesto commitment on National Insurance in the first place. The three main taxes (VAT, National Insurance and Income Tax) are the main levers the government has to fill their coffers and fund the running of state.

The line from Number Ten today was that Mrs May retains full confidence in her Chancellor – with the insistence that it was a “government decision.”

Now, Mr Hammond will have to fill his hole with either alternative marginal taxes, more spending cuts, or further borrowing. None of these are ideal for a post-Brexit Britain and none of them stand a chance if they are to be overruled by Number 10, who critics would say are more concerned with headlines and appeasing backbench MPs than with getting the long-term financial judgements right.

Follow Helia Ebrahimi on Twitter: @heliaebrahimi


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