UK's Hammond in humiliating U-turn on NIC rise for self employed
UK Chancellor Philip Hammond was forced into a humiliating U-turn on Wednesday when he scrapped the controversial plan to increase national insurance contributions for the self-employed.
As the sound of screeching brakes could be heard across Whitehall, Hammond and Prime Minister Theresa May had to acknowledge that they had broken the Conservative Party's 2015 manifesto pledge that it would not raise income tax, national insurance or VAT.
Facing a revolt from up to 100 members of his own party, Hammond buckled to what he said was a "clear view among colleagues and a significant section of the public" less than a week after he introduced the measure in his spring Budget.
In a letter to the Treasury select committee, Hammond said he would scrap the plan to increase the rate of class 4 National Insurance contributions (NICs) to 11% from 9% by April 2019, adding that the money to pay for this would be found by the Autumn Budget".
The embarrassed finance minister faced accusations of 'chaotic' economic management from the opposition Labour Party and business groups as he addressed parliament. His Labour counterpart John McDonnell was scathing of the change to a policy on which the ink was not even dry.
"This is chaos. It’s shocking and humiliating that the chancellor has been forced to come here to reverse a key Budget decision announced less than a week ago," he said in the House of Commons.
"If the chancellor had spent less time writing stale jokes for his speech and the prime minister less time guffawing like a feeding seal on those benches, we would not have been landed with this mess."
The increase was due to raise £325m in 2018-19, then £645m, then £595m, and then £495m in 2021-22 - around £2bn over four years.
"It is very important both to me and to the prime minister that we are compliant not just with the letter, but also the spirit of the commitments that were made," Hammond said.
'The measures I announced in the Budget sought to reflect more fairly the difference in entitlement in the contributions made by the self-employed and address the challenge of sustainability in the tax base," he wrote.
'The government continues to believe that this is the right approach."
The move was welcomed by British Chambers of Commerce director general Adam Marshall.
“The NICs rise, together with the cut to dividend tax-free allowances, was not viewed favourably by entrepreneurs – so this move and pause for thought are welcome. It would be far better to look at business and employment taxation in the round, to ensure that our tax system is competitive and equitable,” he said in a statement.
However, Torsten Bell, director of the Resolution Foundation think tank criticised the about face.
"Whatever the rights and wrongs of Conservative manifesto commitments, today’s U-turn on national insurance means the government has missed an opportunity to correct a big structural flaw in our tax system which allows better-off self-employed workers to pay far less tax than employees," he said.
"This matters both for fairness and for the public finances. The U-turn means the cost of lower national insurance for the self-employed will now grow from £5.1bn this year to an estimated £6.2bn in 2019-20."
The Institute of Directors (IoD) said Hammond should have reform the tax after its own review into modern employment practices was completed.
"The whole national insurance saga can only be described as chaotic. The irony is that there are good reasons to look at levelling the playing field for employees and the self-employed, as the tax on direct employment is disproportionally higher," the IoD said.
"Successive governments have acknowledged that the growth in self-employment has implications for tax revenues, but not one has wanted to take the political risk of undertaking real long-lasting reform."
"The business community needs to feel that the government has confidence in its plans for the tax system, and policy isn’t going to chop and change from week to week. Credibility takes a long time to build, but can be lost in a moment. It is now even more important that the November budget is more far-sighted than the one we have just seen."