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Saturday, 11 March 2017

BOXED IN CHANCELLOR

You’ve got to feel sorry for Philip Hammond. No, really. The day after his Budget he admitted on the Today programme that he was “working within an extremely constrained environment…where most taxes cannot be raised and much of our spending is also ring-fenced and committed. We are navigating within those confines”.

And now he has had to U-turn on one of his flagship policies where he thought he had wriggle room - raising National Insurance Contributions for self-employed people. It would have brought in £2bn over four years to pay towards the growing bill for social care.

The truth is he was boxed in by the tax lock introduced by his predecessor. That was more than a Manifesto commitment – a Manifesto on which Philip Hammond and more than 300 other Conservative MPs were elected. It said “we will not raise VAT, National Insurance contributions or Income Tax”. After winning the election Chancellor George Osborne and Prime Minister David Cameron were so keen on this tax lock they passed a law to prevent themselves and future governments raising the taxes that bring in three quarters of all the Government’s income – VAT, income tax, and national insurance.

So a Chancellor who needs to raise extra money has to look to the other smaller taxes. Philip Hammond has already announced a rise in one of those – insurance premium tax. That will rise by a quarter in June from 8% to 10%. But after that his options for his first Budget on 8 March were severely limited.
  • Corporation tax brings in £44bn a year but the Government has already announced it will be cut to 19% from April and 17% from April 2020. 
  • Duty on petrol and diesel raised nearly £27bn in 2015/16 and the Chancellor had already ruled out a rise in that duty, perhaps comforting himself that the rise in pump prices will bring in more VAT. 
  • The Bank Levy collected £3.4bn but that really could not be raised at a time when banks are threatening – and some considering – leaving the UK when the UK leaves the EU. 
  • Air Passenger Duty raises just over £3bn and that may fall slightly after recent changes to exclude children. But with the Scottish Government planning to slash that by 50% when it introduces its own Air Departure Tax in April 2018 it was impossible to increase APD in the rest of the UK. Already Northern Ireland has its own lower rates. 
  • Stamp Duty Land Tax raises nearly £11 billion but another restructuring was impossible after the two recent ones. 
  • Inheritance Tax will probably raise less than last year’s £4.6bn as the partial exemption for the family home is phased in from April. Any increase there would not be possible for a Conservative government. 
  • Higher Landfill Tax might be popular except that rising costs have already caused a growth in illegal fly-tipping blighting many country areas.

So Hammond fell back on raising car tax and alcohol duty by inflation – using the higher Retail Prices Index even though it is no longer a national statistic – and tobacco by 2% above the RPI. In fact he got a slight windfall because the rate of RPI used by the Treasury for duty is the forecast rate for July to September 2017. And that is 3.89%, way above the latest RPI figure he had to hand for January 2017 which was 2.6%. And, of course, he announced the now infamous rise in self-employed Class 4 National Insurance contributions from its present level of 9% to 10% in April 2018 and 11% a year later. That would still be less than the 12% paid by employees. But he has now been forced to withdraw that as it became clear he could not get enough of his own MPs to support it

Despite the Manifesto promise, this increase was allowed by the Tax Lock law which was passed to implement it. The law only covered “the main primary percentage” which “shall not exceed 12%”, omitting the 9% rate paid by the self-employed. None of the MPs who have now scuppered the proposed rise in self-employed NICs seemed to notice that when they passed the National Insurance Contributions (Rate Ceilings) Act 2015 with little debate, on 3 November 2015. Perhaps he hoped they wouldn't notice again. But they did.

Amended from my Money Box newsletter 10 March 2017, Sign up for future editions here

Version 1.5
15 March 2017