U.K. Scraps Tax Plan, Leaving Budget Hole and Credibility to Fix

  • Chancellor writes to Conservative MPs explaining change
  • Says must honor “spirit” of Tory election manifesto pledge

Theresa May Addresses Self-Employment Tax Issue

U.K. Chancellor of the Exchequer Philip Hammond scrapped a plan to increase tax on the self-employed, after a storm of criticism from legislators in his own ruling Conservative Party.

Hammond was accused of breaking a manifesto pledge not to hike national insurance contributions, made by the Tories before they won the 2015 election, when he announced the proposal in the Budget on March 8. Conservatives said the move was a tax on entrepreneurs, as well as a breach of voters’ trust.

With enough lawmakers voicing displeasure to threaten Prime Minister Theresa May’s slender majority of 17, the government backed down exactly a week after the measure was first unveiled.

An excerpt from the Chancellor's letter.
Source: HM Treasury

“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 in a letter to Conservative members of Parliament on Wednesday.

U-Turn

While the U-turn will pacify backbench Tory lawmakers, it leaves Hammond with dented credibility and a hole in his accounts that he must now fill. The proposed increase in the Class 4 NIC rate to 11 percent from 9 percent by 2019 was forecast to raise about 2.1 billion pounds ($2.56 billion) over four years, making it a key part of his plan to reduce the budget deficit. The first 1 percentage point increase was due to take effect next year.

“While this could undermine Hammond’s authority, by doing it quickly it shows he’s acknowledged the misjudgment and acted on it,” said Tim Bale, professor of politics at Queen Mary University of London.“They could have let it drag out a bit and climb down in the summer, but it was better to get it over with quickly.”

Hammond insists that the cost of the changes will be funded by others measures to be announced in the Autumn budget. Even so, he said the government believes “that the current differences in benefit entitlement no longer justify the scale of difference in the level of total NICs paid in respect of employees and the self-employee.”

Hammond had received strong backing for the move from the Institute for Fiscal Studies, which said those earning less than 15,600 pounds would be better off because of the planned abolition of Class 2 national insurance contributions, a flat-rate levy for those with low earnings.

May’s Hour

Less than half an hour after the letter was made public, May faced lawmakers and told them that the greater number of people who are self-employed posed a problem that required a solution and that she would await the completion of a government tax review before acting.

Official figures Wednesday show the number of people working for themselves rose to a record 4.8 million in the three months through January. Self-employed people now account for a record 15 percent of all workers compared with 13 percent before the 2008 financial crisis.

“The trend towards greater self-employment does create a structural issue in the tax base, one which we want to act to address,” she said. “We do want to ensure fairness in the tax system.”

Hammond explained the decision to back down in a statement to Parliament on Wednesday afternoon. Challenged by opposition Labour lawmaker Rachel Reeves, he denied the move had been ordered by May.

"I’ve been discussing the budget and these issues with the prime minister and others since last Wednesday," he said. "The final decision to make this announcement to the house was made this morning just after 8 a.m."

The climbdown is the latest in a series of U-turns in recent years -- by both main political parties.

The Conservatives’ 2012 Budget became popularly known as an “omnishambles” after George Osborne scrapped taxes on charities, pasties and caravans following a public outcry. Subsequent Budgets saw Osborne retreat over cuts to tax credits for the low-paid and to disability benefits.

In 2008, the then chancellor, Alistair Darling, was forced to water down plans to abolish the 10 percent starting rate of tax after members of his own Labour Party argued the decision would hit those on the lowest incomes, voters they had promised to help.

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