8 March 2017

Budget 2017: is the government headed for trouble over National Insurance?

Tax rises are never easy, and this has all the ingredients of a major row.

“Don’t ever put up income tax, mate. They’ll rip your fucking guts out.” That was the advice that Paul Keating, the Australian Labor leader, gave Tony Blair and Gordon Brown in 1995.

National Insurance contributions aren’t, technically speaking, income tax. But as with tuition fee contributions, they come out of your salary at the same time for most people. It’s a distinction without a difference for the bulk of voters.

David Cameron and George Osborne were so aware of the electoral risk that, panicked by polling showing Labour remaining stubbornly ahead, they pledged not to increase it along with income tax or valued added tax. They even went so far as to pass not one, but two laws forbidding them from doing so.

But as Theresa May and Philip Hammond have discovered, you can win a manifesto promising to balance the books and pledging not to touch any of the major revenue raisers – they have also vowed to stay away from inheritance tax and corporation tax – you can’t govern from it. Most Conservative MPs are austerity Nimbys: they’ll vote through cuts as long as they happen to someone else’s constituents.

Now, in a bid to make the sums add up and to head off a potential crisis in the public finances later down the line, Philip Hammond has pledged to increase class four national insurance contributions. Policy-wise, this is a sensible move. More and more people in high-paying work are likely to move into self-employment and making this change now when it will increase the tax bills of just two and a half million people as opposed to waiting for it to become a systemic shortfall in the public finances makes sense.

But the politics are trickier. The first problem, of course, is that it is a breach of the manifesto promise not to increase National Insurance. The Conservative line is that this doesn’t break the manifesto pledge as that covered class one, not class four contributions. This is a bit like trying to convince your partner that only penetrative sex is adultery; you may be right in law but the audience response is likely to be hostile.

Adding to the headache there is the fact that many Conservative MPs are opposed to tax rises in general, particularly ones which hit “their people”. Add the forthcoming increase in business rates and you have all the ingredients for a storm. Worse still, many high-profile columnists and talking heads will be hit by the change which means that the row will likely receive a disproportionate level of coverage for its impact. (See also: the rows over the mansion tax in the run-up to the 2015 election.)

But my impression from an early sounding out is that Conservative dissidents are more likely to make their objections known in newspaper columns and in private meetings rather than on the floor of the House of Commons. That the coalition against them already encompasses Anna Soubry on the Tory left and John Redwood on the right, however, will mean that the government has reason to fear defeat at worst and severe discomfort at best over the issue. And it all adds to the government’s big problem: that the promises it has made on tax and the deficit cannot be reconciled, even if you assume that the next five years are untroubled either by a messy Brexit or an unexpected economic shock.