These Are the Budget Pitfalls Philip Hammond Needs to Avoid
These Are the Budget Pitfalls Philip Hammond Needs to Avoid
(Bloomberg) -- Whatever U.K. Chancellor of the Exchequer Philip Hammond does in his budget speech on Wednesday, he needs to make sure his plans don’t unravel as some have in the past.
Unforced errors and subsequent U-turns are seized upon by opponents as signs of weakness, as Hammond himself discovered earlier this year when he was forced to ditch a tax increase on the self-employed.
Now the pressure to get it right is more intense than ever. Hammond has his own enemies over Brexit, and the budget offers a chance to steady a Tory government that has lurched from one crisis to another since squandering its parliamentary majority in June’s snap election.
So where have chancellors gone wrong?
National Insurance (2017)
Hammond’s own experience stands as a warning not to misjudge the mood of the country and your own backbenchers. In March, a plan to increase National Insurance Contributions on people who work for themselves—the bedrock of the enterprise culture that Conservatives have championed for decades—was scrapped just a week after he announced it.
Tory lawmakers said the policy was a breach of a 2015 election manifesto pledge not to raise the main taxes. His decision to back down left his credibility severely dented and a 2 billion-pound ($2.6 billion) hole in his budget costings. If it hadn’t been for the damage done to Prime Minister Theresa May’s own authority in June, the fallout would probably have cost Hammond his job.
Welfare Cuts for the Disabled (2016)
Hammond’s predecessor George Osborne saw his commitment to cutting government spending collide with Conservative divisions over Europe and his desire to give tax cuts to the rich.
He increased the threshold at which people start paying income tax at the higher 40 percent rate, raising it to 45,000 pounds, and protected payments to well-off retirees. That reduced the amount allocated for disabled people.
Iain Duncan Smith, who was campaigning for Brexit in the referendum three months later, quit as work and pensions secretary as Prime Minister David Cameron attended a summit in Brussels, accusing Cameron and Osborne of prioritizing politics over “social justice.”
Cameron tried to block the resignation by agreeing to stop the cuts and “work together to get these policies right.”
Luckily for Cameron, Labour leader Jeremy Corbyn decided it was “not up to me” to capitalize on the government’s divisions in an appearance opposite the prime minister in the House of Commons. Less luckily for Cameron, Duncan Smith’s resignation fed dissatisfaction with austerity that helped fuel the vote to leave the European Union.
Tax Credits (2015)
Fresh from an election in which they’d won a majority—albeit a slim one—Osborne and Cameron embarked on an overhaul of benefits and discovered how useful it had been to be in a coalition with the Liberal Democrats, when the first line of opposition was people also sitting around the cabinet table.
With a flourish, Osborne rebranded the minimum wage as a “National Living Wage,” which would rise to 9 pounds an hour by 2020 and was designed to cut the political ground from under the Labour Party. However, he also said he would cut 12 billion pounds from the welfare budget, concentrating his fire on reducing income top-ups and other benefits for people of working age, and limiting support to two children whatever the size of a family.
Independent research suggested average families would be 1,300 pounds a year worse off as a result of the changes to tax credits. The House of Lords blocked the measure.
Four months later Osborne backed down, citing better-than-expected public-finance forecasts, and scrapped the cuts. “I’ve listened to the concerns, I hear and understand them,” he said as he tried to restore his standing as Cameron’s preferred successor. He’s now a newspaper editor.
The Pasty Tax (2012)
Osborne’s plan to tax hot takeaway snacks such as Cornish pasties lasted less than two months after a backlash that saw even his own lawmakers accuse him and Cameron of being posh and out of touch with ordinary voters.
Cameron, more at home with “country suppers” than fast food, was met with derision when he tried to prove his love of pasties by claiming he’d recently bought “a large one” from a stand at Leeds railway station. It had closed two years earlier. The tax increase was reversed.
10 Percent Tax Rate (2007)
Gordon Brown’s last budget as Labour chancellor before he became prime minister featured a measure that would pursue him for the rest of his career. He abolished the 10 percent starting rate of income tax that he had introduced in 1999 and used the savings to fund a cut in the basic rate to 20 percent from 22 percent.
He was accused of selling out low-paid workers—the people his Labour Party was supposed to stand for—and, once he was prime minister, his finance minister Alistair Darling was forced to introduce a series of measures to compensate those who had lost out. Cameron accused Brown of “panic concessions” and acting for “self-interest, not the national interest,” and kept reminding Labour of the fiasco until he himself was forced out last year.
To contact the editor responsible for this story: Flavia Krause-Jackson at fjackson@bloomberg.net, Adam Blenford
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