The Great British Budget blunder
Thursday 2nd November is a historic date: the Bank of England raised its key interest rate from 0.25% to 0.5%. This is the first time for ten years that the Bank has raised interest rates. Its last move was to cut the rate from 0.5% to 0.25%....
Philip Hammond’s U-turn on a proposed rise in National Insurance contributions for the self-employed is one of the biggest blunders ever by a Chancellor of the Exchequer. He promised to add £2 billion to government funding for crisis-hit social care, and thought he could get away with an NI rise to cover part of that cost because his predecessor George Osborne had said that a promise in the Conservative election manifesto from 2015 not to raise NI only applied to the main employer and employee rates. But the manifesto didn’t say that. Both the Tory Press and Conservative back-bench MP’s pilloried Hammond for attacking ‘strivers’ and Westminster gossip says Theresa May demanded he cancel the proposal.
So, less than a week after the Budget, its main tax-raising measure has been canned. This is not a ‘black hole’ in the public finances, but everyone can see that the NHS is in a state of near-crisis and needs more funding, yet the public coffers are empty. What is a Chancellor to do, especially when he has given cast-iron promises not raise income tax or VAT and not to cut NHS or education spending?
The answer is to look for stealth taxes. Obvious ones are insurance premium tax and airport taxes. Expect fuel taxes to rise as well in Hammond’s Autumn Budget. But these are small beer compared with what the Chancellor really needs. He needs money in his back pocket not just to ward off the collapse of near-bankrupt NHS trusts. He also wants to be able to hand out a few tax cuts before the next election – in fact, he will need to do so in the Autumn 2018 Budget for them to have any effect in time to help the Tory election campaign.
So, once again, it is pension tax relief that is the obvious target. There have been many analyses of the possible effects of changes to the tax relief system, but the bottom line is that with most of the proposed new systems, a tweak or two could easily deliver additional revenues of £5 billion a year to the Treasury. Now that’s real money. I would be amazed if later this year Mr Hammond didn’t clutch at what must be looking more and more like the life raft he needs in a stormy sea.