Hammond Criticized Over Broken Promise Not to Raise U.K. Tax
Budget measures would hit self-employed, dividend income
(Bloomberg) -- U.K. Chancellor of the Exchequer Philip Hammond found himself on the defensive after his budget decision to break a 2015 election pledge and increase a tax on income paid by the self-employed.
The chancellor woke to universally critical headlines about the hike in the national-insurance contributions rate. According to the Treasury, the rise will cost almost 2.5 million people an average 240 pounds ($292) a year, though Hammond pointed out that a cut elsewhere in the system announced by his predecessor, George Osborne, means that 60 percent of self-employed workers will be better off overall.
Philip Hammond on March 8.
The move was criticized not simply because it was a tax rise on entrepreneurs, but because it breaks a promise from the last election that the Conservatives wouldn’t increase income tax or national insurance. Hammond argued that this pledge had been a “broad commitment” that only covered the main national-insurance rate.
More serious for Hammond is the number of Conservatives publicly criticizing his decision. Prime Minister Theresa May’s government has a working majority of 17, meaning it can lose a vote if as few as nine Tories rebel. Lawmaker Anne-Marie Trevelyan said the tax increase “goes against every principle of Conservative understanding of business.” Her colleague, Anna Soubry, predicted opposition to the move could lead to the “first U-turn” of the Budget.
Tory Rebellion
“It hurts entrepreneurs and it breaks an election promise. He would have struggled to pick something more likely to provoke a Tory rebellion,” said Philip Cowley, professor of politics at Queen Mary University of London and an expert on parliamentary revolts. “This is a government with a tiny majority. Let’s see if it makes it.”
The increase was the most contentious part of a fiscally restrained budget that sought to prepare the economy for leaving the European Union with investments in schools and technical education. May has pledged to trigger formal negotiations this month.
“Britain’s circumstances have moved on,” Hammond told ITV television on Thursday. “We’re now facing the challenge of leaving the European Union, of building a global Britain to exploit the opportunities in the future.”
Hard to Justify
Hammond defended the decision to target the self-employed on the grounds of fairness, saying a person earning 32,000 pounds a year pays only a third of the national insurance levied on a salaried employee on the same income. That, he argued, is no longer justifiable now that the self-employed enjoy similar pension entitlements to employees. People who work for themselves now account for 15 percent of the British workforce.
The knock-on effect of the budget has been to quash speculation that May will call an election in the coming months.
The prime minister had been facing growing calls to make the most of her poll ratings and an opposition in disarray by holding an early general election to bolster her slim parliamentary majority. While another European election would add to political risk, victory for May would strengthen her hand as she enters divorce talks with the EU, according to Conservatives including William Hague, a one-time party leader and former foreign secretary.
“Think we can rule out a snap election,” Rupert Harrison, a former aide to Osborne and now chief macro strategist at BlackRock Inc., said on Twitter.
Better Off
The planned increase in the Class 4 NIC rate to 11 percent from 9 percent by 2019 is forecast to raise about 2.1 billion pounds over the next five years. It applies to self-employed workers with annual profits of more than 8,060 pounds, with the first 1 percent increase taking effect next year.
Hammond received strong backing from the Institute for Fiscal Studies, which said the tax hike would close only a “small fraction” of the gap with salaried workers. The maximum loss amounts to 590 pounds a year, and those earning less than 15,600 pounds will be better off because Class 2 contributions, a flat-rate levy for those with low earnings, are being abolished at the same time.
“The tax advantage to being self-employed will still run into the thousands of pounds,” IFS Director Paul Johnson told a briefing in London. “A tax system which charges thousands of pounds more in tax for employees doing the same job as someone else needs reform.”
A separate Budget decision to lower the tax-free threshold for dividend payments will generate about 2.6 billion pounds by 2022, potentially putting the government on a collision course with Tory-supporting savers, pensioners and business owners.
Together, the revenue will help fund extra spending on social care, education and relief for those hardest-hit by changes to a tax on commercial premises.
“No Conservative likes to raise tax,” Hammond told BBC Radio 4. “We needed to raise revenue in this budget in order to fund social care. It will make the system a little bit fairer.”
--With assistance from Alex Morales and Thomas Penny
To contact the reporters on this story: Svenja O'Donnell in London at sodonnell@bloomberg.net, Robert Hutton in London at rhutton1@bloomberg.net.
To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Andrew Atkinson