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9 March 2017

How the Conservatives have avoided outrage over the real Budget pain

Welfare cuts will hit the self-employed and others far harder than the National Insurance rise. 

By George Eaton

Philip Hammond prides himself on being a less political Chancellor than George Osborne – more concerned with strengthening the tax base than securing rapturous headlines. But Hammond could be forgiven for despairing at the reception awarded to his Budget by the press and Conservative MPs. His decision to increase National Insurance (NI) by 2 per cent for the self-employed has triggered outrage among both. “Spite Van Man,” reads the Sun’s front page. “No laughing matter,” declares the usually loyal Daily Mail

A Budget in which a tax rise is the headline measure is always vulnerable to criticism. But Hammond’s team did not help their cause. Their decision to breach the Conservatives’ manifesto commitment not to increase NI (and then to pedantically insist that the pledge only applied to Class 1 contributions) further antagonised critics. To the surprise of some Tories, little attempt was made by the Treasury to prepare the ground in advance. No.10 has refused to confirm that the NI rise will go ahead, leaving few Conservative MPs prepared to defend it. 

But though deemed a political failure by many, the wonks have judged the measure a policy success. The Resolution Foundation (led by Ed Miliband’s former policy director Torsten Bell) and the Institute for Fiscal Studies have emphasised that the move is progressive (96 per cent of the increase is paid by the top 50 per cent and the top 10 per cent pay the most) and that it modestly reduces the tax advantages enjoyed by the self-employed. 

Yet for all the fury, as IFS director Paul Johnson noted, the tax rise is small beer compared to the forthcoming welfare cuts. The removal of tax credits from third and subsequent children will cost 600,000 three child families an average of £2,500 a year, while 300,000 families with four or more will be £7,000 a year worse off an average. By contrast, the maximum loss from the NI rise will be £589 per year (affecting those with profits over £45,000). Four million families will lose out from the reduction in the “family element” of tax credits, with most £545 a year worse off. 

As Johnson later added: “If you’re really concerned about changes affecting the low income self-employed it is to Universal Credit that you should be looking.” New treatment of the self-employed means the government will save £1.5bn at their expense, while the NI rise saves just £145m.

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This disparity is a reminder that those measures which cause the most political outrage are rarely those which cause the most financial pain. The disproportionate focus on the NI rise reflects several factors: the influence of the affluent self-employed (among them numerous journalists), the anger of Tory MPs that “their people” (thrusting entrepreneurs) are being hit and cuts fatigue after years of austerity budgets from Osborne.

May has also adeptly repositioned the Conservatives by pledging no new welfare cuts and repeatedly vowing to defend “ordinary working families”. Yet as the IFS showed, this doesn’t alter the dramatic measures she inherited from David Cameron. In Hammond’s Autumn Statement last year, the Universal Credit taper rate was reduced from 65 per cent to 63 per cent but no further concessions were made yesterday. As low-income families prepare for this April’s austerity, they could reasonably ask why so few seem concerned.