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Philip Hammond defends scrapping national insurance rise for the self-employed Philip Hammond defends scrapping national insurance rise for the self-employed
(about 3 hours later)
Philip Hammond has defended ditching the national insurance rise for the self-employed that was the centrepiece of his first budget, just a week after delivering it. Philip Hammond ditched plans to increase national insurance contributions for the self-employed yesterday, in a humiliating U-turn just a week after the measure formed the centrepiece of his first budget.
The chancellor was flanked by the prime minister in the Commons on Wednesday as he appeared to explain the government’s decision to drop the policy. The chancellor signalled the abrupt change of heart in a letter to Conservative MP Andrew Tyrie, the chair of the treasury select committee, following a revolt by backbench MPs that Hammond had proved unable to quell.
Hammond repeatedly said he stood by the rationale for the NICs rise, citing estimates from HMRC that the growing proportion of self-employed people in the workforce was set to cost £5bn a year in lost tax revenue. Both the Treasury and No 10 insisted the decision, which leaves a £2bn hole in the chancellor’s budget plans over the next five years, had been taken jointly by May and Hammond.
“The government continues to believe that addressing this unfairness is the right approach,” he said. “However, since the budget, parliamentary colleagues and others have questioned whether the increase in class 4 contributions is compatible with the tax lock commitments made in our 2015 manifesto.” But at Westminster on Wednesday night some MPs insisted May had ordered her chancellor to drop the plans, fearing that breaking the party’s manifesto pledge to make “no increases in VAT, national insurance contributions or income tax”, would do too much damage to the Conservatives’ reputation.
The shadow chancellor, John McDonnell, urged the chancellor to apologise to self-employed voters for announcing – and then abandoning – the policy, which was set to raise £645m a year by 2019-20. Class 4 NICs, the rate paid by self-employed people, were due to rise from 9% to 10% next April and 11% in 2019, to narrow the gap with employees, and prevent the tax base being eroded as self-employment becomes more widespread.
“These people are the engines of our economy. They deserve to be respected, and not attacked,” McDonnell said, describing Hammond’s move as a blunder. Hammond continued to defend the policy, which he said would have helped to address the fact that the self-employed pay less tax than employees, despite receiving many of the same benefits, including, from April next year, the same access to the state pension.
He also urged the chancellor to give more details of how he will fill the black hole created in his budget. The extra funds raised by the measure were earmarked for social care and building new schools. “We need to know now where these desperately needed funds will come from,” McDonnell said. But he conceded the NICs rise breached the “wider understanding of the spirit,” of the Tory manifesto.
Hammond had come under sustained pressure to ditch the measure from Conservative MPs, who were concerned that the measure, which was due to be implemented in April next year, would undermine entrepreneurs and hit “white van man”. “The government continues to believe that addressing this unfairness is the right approach,” he said. “However, since the budget, parliamentary colleagues and others have questioned whether the increase in class 4 contributions is compatible with the tax lock commitments made in our 2015 manifesto,” he said.
Ann-Marie Trevelyan, a backbench MP who had raised concerns about the NICs rise, welcomed the chancellor’s change of heart, saying: “My leaflets had ‘no tax rises’ on them. That’s political capital we would never get back, and we are the party of sensible taxation.” In the Commons shadow chancellor John McDonnell urged him to apologise to the self-employed.
Hammond told MPs: “This government sets great store in the faith and trust of the British people.” “This is chaos. It is shocking and humiliating that the chancellor has been forced to come here to reverse a key budget decision announced less than a week ago. 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 the Treasury bench, we would not have been landed in this mess.”
The abrupt policy change was signalled by the chancellor on Wednesday morning, in a letter to Andrew Tyrie, the chairman of the Treasury select committee. He added: “Nobody should be too arrogant to use the word ‘sorry’ when they blunder so disastrously.”
The issue dominated exchanges at PMQs, where Jeremy Corbyn accused May of presiding over “a government in a bit of chaos here”, which had produced “a budget that unravels within seven days”. A cross-section of Conservative MPs, from the centrist Nicky Morgan to arch-Brexiteer Jacob Rees Mogg, stood up to offer their support for the chancellor – but some loyalists questioned why they had spent the week defending the controversial policy, only to see it dropped.
May responded to the Labour leader: “I normally stand at this dispatch box and say I won’t take any lectures from the right honourable gentleman. When it comes to lectures on chaos he’d be the first person I’d turn to.” Desmond Swayne, Conservative MP for New Forest West, asked the Speaker, John Bercow, if he could raise a point of order, saying, “as a slavish supporter of the government, I am in some difficulty. My article for the Forest Journal, robustly supporting the chancellor’s earlier policy, is already with the printer … Having been persuaded of the correctness of the course that the chancellor is now following, I merely needed an opportunity to recant.”
The Conservative backbencher Stephen McPartland, who objected to the changes, welcomed Hammond’s climbdown. “It’s fantastic news, and shows he’s a strong chancellor, because he can admit when he’s made a mistake. I’m delighted with the announcement and I really look forward to working with him to deliver for self-employed people going forward.” Ann-Marie Trevelyan, a backbench MP who had raised concerns about the NICs rise, told the Guardian she welcomed the chancellor’s change of heart: “My leaflets had ‘no tax rises’ on them. That’s political capital we would never get back, and we are the party of sensible taxation.”
May had been forced to defend the rise at a press conference in Brussels on Thursday, and promised the government would not legislate to introduce the changes until the autumn. That would allow MPs to consider the measure alongside other planned changes, including improved maternity and paternity rights for the self-employed. Hammond made clear that it was the charge of breaching a manifesto commitment that had made up Downing Street’s mind. “This government sets great store in the faith and trust of the British people,” he said.
Class 4 NICs were due to rise from 9% to 10% next April and 11% in 2019. Hammond said in his budget speech that would help address the fact that employees were taxed more heavily than the self-employed. Earlier the measure had dominated PMQs. Jeremy Corbyn said: “It seems to me that the government are in a bit of chaos here” – though he then frustrated some of his own backbenchers by switching tack to focus on education.
In his letter, he underlined that rationale, saying: “The measures I announced in the budget sought to reflect more fairly the differences in entitlement in the contributions made by the self-employed and addresses the challenge of sustainability of the tax base. The government continues to believe that this is the right approach.” Angus Robertson, the SNP’s leader at Westminster, said: “We once had a prime minister who said, ‘The lady’s not for turning’ … My goodness.” He went on to welcome what he described as May’s “screeching, embarrassing U-turn on national insurance contributions”.
The Treasury said last week the measure complied with the detail of the “tax lock” legislation introduced after the 2015 general election to implement the manifesto pledge not to increase national insurance rates. The bill mentioned only class 1, the main NICs rate, paid by the majority of people in work. However, not all Conservatives were happy with the decision, which raised questions about the Conservatives’ authority to press ahead with controversial tax-and-spending decisions with a narrow parliamentary majority.
But in his letter, Hammond conceded that the move did not comply with the spirit of the pledge. “It is very important both to me and the prime minister that we are compliant not just with the letter, but also the spirit, of the commitments that were made,” he said. Ryan Shorthouse, director of Conservative thinktank Bright Blue, said: “It was perfectly reasonable and justifiable to narrow the gap in the contributions made by the self-employed and employees to the public purse.” He added that any spare resources should be devoted to Britain’s poorest families.
Speaking to journalists afterwards, the prime minister’s spokesman defended the reversal, saying May and Hammond had listened to concerns and acted quickly. “The finances of the lowest earners in this country – whom the prime minister has described as ‘just about managing’ – are being hit by the the ongoing and deep cuts to in-work benefits in this parliament, introduced by the last chancellor. The focus of government should be softening these cuts, not reversing the class 4 NICS rise.”
The decision had been made on Wednesday morning, the spokesman said. “The prime minister and the chancellor have heard what colleagues have had to say in recent days, and they have taken a decision that has been announced to parliament at the earliest opportunity.” Hammond promised to make no increases to NICs for the rest of this parliament; and said the government would widen the scope of a planned review into whether the self-employed should receive better paternity rights, to include other benefits too.
He denied the government was accepting that the scale of rebellion among their own backbenchers was so great that the party could not have passed legislation on the issue. May opened the way to the U-turn on Thursday night at a press conference in Brussels after the European Council meeting, when she defended the principle of the NICs rise, but said the government would not legislate on it until the autumn.
Asked whether Hammond and May had read the 2015 Conservative manifesto, the spokesman said: “They stood on that manifesto.” He insisted May retained full confidence in her chancellor.
The measure was due to raise £645m a year by 2019-20 to help fund new schools and social care. Hammond will now face questions about how he will make his budget plans add up. In his letter he said he would announce in the autumn statement how the extra funds would be raised.
The shadow chancellor, John McDonnell, said: “The chancellor’s authority is shredded only a week since his first budget, after being forced to U-turn under Labour pressure.”
Rachel Reeves, the former shadow work and pensions secretary who sits on the Treasury select committee, accused the government of an “extraordinary U-turn after a shoddy announcement”.
She said Hammond “now needs to show where the £2bn shortfall is going to be made up”.