My Lords, with the leave of the House, I shall now repeat a Statement made in the other place by the Chancellor of the Exchequer, the right honourable Philip Hammond. The Statement is as follows:
“With permission Mr Speaker, I wish to make a statement on national insurance contributions paid by the self-employed. As I set out in the Budget last Wednesday, the gap between benefits available to the self-employed and those in employment has closed significantly over the last few years. Most notably, the introduction of the new state pension in April 2016 is worth an additional £1,800 to a self-employed person for each year of retirement. It remains our judgment, as I said last week, that the current differences in benefit entitlement no longer justify the scale of difference in the level of total national insurance contributions paid in respect of employees and the self-employed.
Honourable and right honourable Members will also be aware that there has been a sharp increase in self-employment over the last few years. Our analysis suggests that a significant part of that increase is driven by differences in tax treatment. HMRC estimates that the cost to the public finances of this trend is around £5 billion this year alone and the OBR estimates that the parallel increase in incorporation will cost more than £9 billion a year by the end of the Parliament. This represents a significant risk to the tax base and thus to the funding of our vital public services.
The measures that I announced in the Budget sought to reflect more fairly the differences in entitlement in the contributions made by the self-employed. The Government continue to believe that addressing this unfairness is the right approach. However, since the Budget, parliamentary colleagues and others have questioned whether the proposed increase in class 4 contributions is compatible with the tax lock commitments made in our 2015 manifesto. Ahead of the Autumn Statement last year, the Prime Minister and I decided that however difficult the fiscal challenges we face, the tax lock and ring-fenced spending commitments we have made for this Parliament should be honoured in full.
I made that clear in my Autumn Statement to this House. As far as national insurance contributions are concerned, the locks were legislated for in the National Insurance Contributions (Rates Ceilings) Act 2015. When the Bill was introduced, it was made clear by Ministers that the lock would apply only to class 1 contributions. The measures I set out in the Budget fall within the constraints set out by the tax lock legislation and the spending ring-fences. However, it is clear from discussions with colleagues over the last few days that this legislative test of the manifesto commitment does not meet a wider understanding of the spirit of that commitment.
It is very important both to me and to my right honourable friend the Prime Minister that we comply not just with the letter but also with the spirit of the commitments that were made. Therefore, as I said in my letter this morning to the chairman of the Select Committee, my right honourable friend the Member for Chichester, I have decided not to proceed with the class 4 NICs measures set out in the Budget. There will be no increases in national insurance contribution rates in this Parliament.
For the avoidance of doubt, as I set out in the Budget, we will go ahead with the abolition of class 2 national insurance contributions from April 2018. Class 2 is an outdated and regressive tax and it remains right that it should go. I will set out in the Autumn Budget further measures to fund in full today’s decision.
I undertook in the Budget speech to consult over the summer on options to address the principal outstanding area of difference in benefit entitlement between employed and self-employed, which is in parental benefits. We will go ahead with that review. We now intend to widen this exercise to look at the other areas of difference in treatment alongside the Government’s consideration of the forthcoming report by Matthew Taylor, chief executive of the Royal Society of Arts, on the implications of different ways of working in a rapidly changing economy for employment rights. Once we have completed these pieces of work, the Government will set out how they intend to take forward and fund reforms in this area.
Reducing the unfairness of the difference in the tax treatment of those who are employed and those who are self-employed remains the right thing to do. But this Government set great store in the faith and trust of the British people, especially as we embark on the process of negotiating our exit from the European Union. By making this change today, we are listening to our colleagues and demonstrating our determination to fulfil both the letter and the spirit of our manifesto tax commitment. I commend this Statement to the House”.
My Lords, I am fairly sure that the House will not be taking the Statement in quite the positive way in which the Minister clearly hopes. Conservative Party Budgets and U-turns seem to come hand in hand these days, but this is one of the outstanding ones. Scrapping the centrepiece of the Budget in less than a week is going some, even by Conservative Chancellors’ standards. When Chancellors make really egregious mistakes they are always compared with Hugh Dalton, who was fired almost immediately on the spot for the leak to the lobby correspondents as he walked in to deliver his Budget. When I think about other errors that Chancellors have made, this one comes pretty close to that. As the Chancellor has obviously been in close contact with the Prime Minister, I imagine that his hair has stood on end these last few days—brushed well though it normally is.
The changes announced today amount to a £325 million revenue loss in 2018-19 and a further loss of £645 million in 2019-20. They raise a number of questions, not only about the obvious gaping hole left in our country’s finances but also about the critical relationship between the Prime Minister and the Treasury. After all, we all know there is a connecting route between Nos. 10 and 11; they are adjacent properties. It therefore seems that the Prime Minister is bound to have been consulted on the Budget.
What we need to know is this. In his letter to Conservative Back-Benchers, Philip Hammond said:
“The cost of the changes I am announcing today will be funded by measures to be announced in the Autumn Budget”.
That is not good enough. At a time of already considerable uncertainty over our future relationship with the EU and the terms that we will obtain, and the impacts that that will have on trade and the whole issue of business confidence in this period, this is just about the last thing we need—a mess-up on a Budget.
If past Budgets or Autumn Statements are anything to go by, waiting for months only to hear that welfare spending or local council funding has been cut even further is not acceptable, yet we know both of those have been in the Government’s firing line in recent months. Furthermore, can the Minister assure this House and the public that the £2 billion announced for social care will be safeguarded? Informed opinion thought the emergency needs of social care were £2 billion a year, so we were already critical enough about the Chancellor’s decision to award it £2 billion over three years—that is, about one-third of what is necessary. The House will want an assurance today that that money at least is to be safeguarded.
The Prime Minister has said it was the Government’s decision to U-turn on national insurance contributions, but whose decision was it to put it in the Budget in the first place? In the consultation, were people not aware of the manifesto commitment? Surely the Government are not seriously saying that the Chancellor spoke to no one except officials before the Budget was produced. What about these other significant figures, his Treasury Ministers, who line up with their boxes in photographs and take pride in the Budget? No one among them appears to have recognised the manifesto commitment, leaving the public suspecting that it was the Prime Minister who put the Chancellor right. There will probably be consultations over a number of issues in the future and if they are at the informed and perceptive level of the construction of this Budget then we are all in for a rather bumpy ride.
This after all was one of the Chancellor’s major announcements in his first Budget. Surely he must have consulted people. We and indeed the country are at a loss as to why no one recognised what is now regarded as an important block—namely, that at the last general election the Conservative Party made a series of promises, not all of which have been fulfilled, though the ones that have been fulfilled are the ones that we on this side of the House find most onerous. It turns out that as far as this Budget was concerned this promise was the critical one, yet the Chancellor went blissfully on to deliver the Budget.
As the IFS has made clear with regard to self-employed people on low incomes, the NICs uprating was only ever small in comparison with the more significant changes that the Government are making to universal credit, yet this is the one that has shaken the Chancellor. I hope the Minister recognises that the self-employed will remain worried about what they will be taking home at the end of the month following this fracas. On the abolition of NICs 2, which the Chancellor has today confirmed will go ahead, how will the rights previously obtained by class 2 contributions be ensured?
There is now a gaping hole in the Budget and the Chancellor needs to reassure the nation that he will cope with the financial problem represented by this blunder. Finally, if no action on NICs 4 is to be taken in this Parliament, what on earth is the purpose of Matthew Taylor’s work? If there is such a block on action on this one crucial area—the Government have after all emphasised how crucial it is in terms of changing patterns of work—until after the next general election, we are all left to wonder just what will be the purpose of that work.
My Lords, what a climbdown. And what a spat between No. 10 and No. 11. The Chancellor has always had a tin ear, but did the Prime Minister not recognise that the NICs change was, in effect, a tax increase on the plumber, white van man, the entrepreneur and women working from home because of children—people who are typically “just about managing” and whose income fluctuates, is low and is often unreliable?
Yesterday, in the Budget debate, the noble Lord, Lord Willetts, spoke of the now discarded NICs change as a way to combat companies that, to benefit from tax arbitrage, push people out of employment into less certain self-employment. I suggest, as I did then, that if the NICs changes had been focused on those companies seeking that tax arbitrage, rather than on the self-employed—manifesto pledge or no manifesto pledge—the response would have been very different. Were the Tory Government following their usual pattern of protecting big companies and big business and hitting the little people?
It is crucial, as I think everyone in this House would agree, that the increase of £2 billion for social care remains, inadequate though it is, being spread over three years. How will the Government fill the gap in the public finances when the Chancellor is so constrained by expected blows from hard Brexit? Can the Minister give us today a guarantee that it will not be filled by more severe spending cuts parts of the public sector already under extraordinary pressure? Do the Government agree that the whole Victorian structure of business and employment taxes needs re-examining? The former BIS Secretary, Sir Vince Cable, is chairing such a review for the Liberal Democrats. Will this Government, among their many reviews, take on frankly a review of similar scope, because it is vital?
When spreadsheet Phil decides to shoot from the hip, we surely have a Government puffed up in hubris. I am afraid that this exactly reflects the arrogance that led the Government to hard Brexit. If they have a tin ear over their own self-employed, how bad is the tin ear that they will take into EU negotiations?
My Lords, I say to the noble Lord, Lord Davies, that we are reluctant to take advice from the Labour Party on promoting harmony between No. 10 and next door. He will recall that Budget measures introduced by the Labour Government subsequently had to be revised. For the Liberal Democrats, the noble Baroness was cautious enough not to mention manifesto commitments—there are certain issues from her party that would be brought to mind.
We have made it absolutely clear that we will make good the fiscal impact of this decision in the Autumn Statement. We are not minded to borrow more, which has sometimes been suggested. However, in response to the serious issue raised by both the noble Lord and the noble Baroness, I can give a firm assurance that all the spending commitments made in the Budget will be honoured—on skills, on adult social care and on accident and emergency. We stand by those commitments.
The noble Lord asked about universal credit. There will be no change to the entitlement to universal credit by the self-employed. On the broader issues about the Taylor review, there is an issue here—and the Labour Party has recognised it as an issue; it has a commission looking at the issue. I do not think that it would be right to do what the noble Lord suggested, which is to ditch the Taylor review. It is important that we go ahead with it, but we have ruled out certain responses in how we take it forward. But there is an issue here—a threat to the tax base that we need to address.
The Autumn Budget will make good the deficit, in the normal way, so the hole will be filled, and the Chancellor remains committed to sound finance, reducing the deficit and investing in infrastructure and key public services. Those commitments remain as before.
My Lords, my noble friend will know that the Chancellor’s original proposal was widely welcomed by, for example, a leader in the Financial Times and the Institute for Fiscal Studies. Would he agree that the way in which the doctrine of the manifesto has developed over almost the last century needs further review now? We find ourselves in a situation where a manifesto appears at short notice, is subject to absolutely no consultation with anyone and is not subject to amendment. In those circumstances, it is not surprising that it sometimes contains rather unfortunate proposals. None the less, one must obviously abide by it in general terms—but one must surely take into account changes in circumstances. The result of the referendum means that the Chancellor will be faced with immense problems in this Parliament. Is it not a mistake to continue to tie his hands, and should we at least give him the possibility of not sticking to the manifesto commitment as it was conceived at the time of the election because of these changed circumstances? He ought not to be bound by the triple lock, which is after all a major aspect of fiscal policy, when we are trying to deal with all the problems that a hard or even a soft Brexit may produce.
My noble friend gives some wise advice on the number of commitments in the manifesto. I think that we had 600 in our last manifesto, and I am sure that there are lessons to be learned. But I cannot agree with him that we should ditch our manifesto commitments. Confidence in the political system is not that high and if any party, once elected, were to break its manifesto commitments along the lines that my noble friend has suggested, it would not enhance confidence in the political system at all. So we have to stick within the commitments that we made and find other ways in which to reduce the deficit.
Although I welcome the fact that the Government have backed down on this, the reason given very clearly is on the spirit of a manifesto commitment not being broken. Well, the biggest manifesto commitment that has been broken is remaining in the single market. Are the Government now going to back-track on that? We shall wait and see.
The main reason why people—and when I say people I mean Members across the parties in another place and here—objected to this increase in national insurance contributions for self-employed people affecting more than 2.5 million people is because the perception that it sends out is that the Government are going after and hitting the very people who take the risk to be self-employed and going against encouraging entrepreneurship. Would the Minister agree that the main role of government in this area is to encourage entrepreneurship, which means encouraging job creation, tax takes and growth, which will help to get rid of the deficit—not by hurting the very people who will create that growth?
The noble Lord will know that we have taken a number of measures to promote enterprise. We have reduced corporation tax and we are investing in infrastructure and broadband. I do not want to reopen a discussion that we have had for the last two or three weeks about the single market and Brexit, but what has happened is that there was an announcement last week and there were then discussions with parliamentary colleagues and others. Against the background of those discussions, the Government have decided not to proceed. This is not an unparalleled development in the political system. It is a measured and proportionate response to some very real reactions that we got from colleagues down the other end.
Can I give the Minister two messages for the Chancellor? First, the greatest unfairness in national insurance—as I look around the House, this will not go down very well—is the cut-off point at age 65. Whether people are on salaries or pensions, national insurance is general taxation and it should cover everybody who has a relevant income. I cannot see how that could be covered by this lock. My second message is more widespread. It comes from the mid-1990s, when some of us on the Front Bench were sent to Templeton College, Oxford, on the basis that one day we might be Ministers. The abiding lesson that I took away from that seminar was a simple one: it is never too late to avoid making a bad decision.
If the noble Lord is saying that if you make a bad decision it is never too late to undo it, I understand that. On his other point, there is an argument for harmonising tax and national insurance; this debate has been going on for some time. It is not without its consequences. National insurance is a contributory benefit—you contribute to your state retirement pension. If you have retired and drawn your pension, what is the argument for continuing to make national insurance contributions if your pension is not going to go up as well? Harmonising is a complex issue, which we will of course continue to look at. But I have to say, it is not something that the Labour Government did while they were in office.
My Lords, I draw the House’s attention to my interests as listed in the register, particularly as a member of Sheffield City Council. As the national insurance contribution changes were widely briefed by the Government to pay for extra social care funding and business rates support, will the Minister now give an absolute guarantee that local government budgets will not be raided to pay for the gap that has now been made by this U-turn?
My Lords, I congratulate the Chancellor on his change of heart. I am sure that he is encouraged by yesterday’s debate here on the Budget and the contributions of my noble friends Lord Flight and Lady Altmann and the noble Lord, Lord Bilimoria, and others. I welcome this measure for self-employed business, but can the Minister make representations to the Chancellor on the subject of dividend tax changes, which will hit small incorporated businesses particularly hard, and also on the new proposed probate tax, which has not come in yet but which will affect current and potential Conservative voters in London in particular?
I am grateful to my noble friend for drawing attention to the very good debate that we had yesterday on the Budget Statement. I will ensure that the Chancellor is aware of the views that were expressed by him and others, not just on the national insurance issue but also on probate and the changes to the dividend tax allowance. Whether it was my noble friend’s speech last night that caused the Chancellor to change his mind this morning, I am not quite so sure, but I am grateful for his support this evening.
My Lords, does the Minister accept that the Statement is a brilliant piece of euphemistic improvisation? It may well be that the man in the street will remind himself of a line of Victorian poetry, “Someone had blundered”. However, does he accept that it is entirely appropriate for the Government to proceed with extreme caution on this fateful day, the Ides of March?
My Lords, further to the excellent exchange between the noble Lord, Lord Higgins, and the Minister, is not the moral of this episode—indeed, one that should be taken by all parties—that manifestos that read like mail order catalogues are a bad idea and that manifestos would be better confined to one side of A4?
I have some sympathy with that as a person who has had to defend manifestos over 10 general elections. It is important that the public have some idea of the direction in which a political party will take the country if it is successful in a general election, and that manifestos give some idea about the big issues such as public ownership, tax, defence, the police and law and order. However, 600 commitments, which I think is what we made, may be on the high side. By the time we hit 2020, I am sure everybody will learn that there is something to be said for brevity.
My Lords, I think I can paraphrase the remarks of the noble Lord, Lord Rooker, by saying:
“To improve is to change; to be perfect is to change often”,
as Churchill said. It is a strength that the Government can change their mind so openly and directly, and I wish that politicians would more often simply and openly accept that they have changed their mind in the light of the evidence. So, in that sense, I welcome this announcement. My concern is about the further measures. One of the problems with the triple lock and the guarantee on tax rates and so on is that tax increases tend to be stealth taxes of one form or another. In a healthy democracy, the more open, direct and progressive taxation is, the better. I wonder whether the Minister is willing to make some comment, from his heart, on that suggestion.
The right reverend Prelate invites the sinner to repent; I think that was the gist of his remarks. I am sure the Chancellor, as he reflects on how to make good the deficit that we now have in the Budget, will take on board the suggestion that the right reverend Prelate made about openness and avoiding stealth taxes. However, I hope he is not implying that the Government should not make good the deficit and continue with their policy of getting it down.
My Lords, I congratulate the Chancellor on his brave and sensitive decision to change his mind. I see our Labour colleagues smiling, but the Chancellor changed his mind after seven days. They have not changed their minds after 18 months of having the wrong leader. At least our Chancellor got the message—
Oh yes we have.
I bow to the noble Lord’s greater intimacy with those decisions.
I pick up on the many points made about the value of manifesto commitments. It seems to me inevitable that other manifesto commitments will have to be considered: the triple lock is just one clear example. Can we learn from this lesson and make sure that the debate is had before those decisions are made, rather than waiting until the SAS comes through the window?
I am grateful to my noble friend. I think there is something for all the political parties to learn in terms of setting up policy reviews well in advance of the 2020 general election and involving party members and other people, as appropriate, as they develop their policies, rather than leaving things to the last moment. I therefore take heart from what he says. I am sure that we will all learn from what has happened today.
My Lords, many of those who are self-employed are also registered for value added tax. I declare an interest as such a person. However, the Government, with effect from 1 April, will introduce a flat rate for limited-cost businesses under the VAT flat rate scheme. This will have an immediate effect for many people in that position of increasing the money they pay to HMRC by a margin of 2% or 3%—in some cases more—of their turnover. Is that consistent with the spirit of the Conservative manifesto?
My Lords, I too add my congratulations to the Chancellor on his very sensible and timely decision. The idea that self-employed and employed people have opportunities for arbitrage, and that that needs to be corrected, is absolutely right. However, the Chancellor should be applauded for concluding that we should wait until the Matthew Taylor review and a more thorough analysis can be carried out, and then come back in the autumn with perhaps different proposals that will achieve the desired impact without breaking manifesto commitments and recognise the huge importance to our economy of encouraging self-employment, risk-taking and the establishment of new businesses.
I am grateful to my noble friend for what she has just said and for her contribution to yesterday’s debate on the Budget. I am sure she is right in what she says about the Taylor review and about finding the right way through the dilemma of continuing to encourage enterprise and self-employment where it is legitimate while, on the other hand, removing the opportunity for arbitrage and abuse, which in some cases is taking place at the moment. I am grateful for her support.
My Lords, a very famous operator in the field of social security and taxation once said, “When the evidence and the facts change, I change my mind”. That is very wise advice for the Government. What concerns me in all this is that the Government have locked themselves for the whole of the Parliament into what I would regard as a rash, ill-judged manifesto commitment. A black hole—not the first one—now appears in our public finances and will have to be remedied over time, as the Minister has already acknowledged. The question for us now is: as people on benefits, housing benefit and low incomes have been hurt, who will be hurt by whatever measures emerge to fill this black hole?
I understand the noble Lord’s concern but, as I said when I repeated the Statement, in his Autumn Budget the Chancellor will outline the measures that he will take to make good the revenue lost by this decision. Therefore, the noble Lord will have to wait until the Autumn Statement for the answer to his question, but I know that the Chancellor will take on board his concern for the lower paid and the less well off as he addresses those issues.
My Lords, I congratulate the Chancellor on his rapid reverse but might it be worth reminding the Labour Party what a long time it took for it to drop the absurd selective employment tax, invented by Professor Kaldor? It hung round Labour’s neck for a very long while. As for filling the gap, did my noble friend notice the suggestion that I made yesterday that one of the easiest things to do is to reverse the freeze on road fuel duty, which would do less than make up for inflation? An increase of 10p a litre would produce £4.6 billion of revenue this year, next year and every year.
I am grateful to my noble friend for reminding us about the selective employment tax, which I had totally forgotten about until he reminded me a few moments ago. I am also grateful to him for making a suggestion as to how the gap might be filled —something that we have not had from many other contributors. I know that as the Chancellor approaches his Autumn Budget he will take on board my noble friend’s suggestion, but I give no guarantee at all that he will implement it.
Without wishing to sound a sour note, does the Minister accept that, in the view of many of us, no congratulations to the Chancellor are necessary on what is in fact a humiliating U-turn? As former Whips in the other place, the Minister and I both know that the reason the Chancellor has backed down is that he does not have a majority for this measure on his own Back Benches. That is the simple explanation. As far as the welcome advice that the Chancellor is now going to take from Mr Matthew Taylor, I recollect—and I hope that the Minister does too—that Mr Taylor was a distinguished adviser to Mr Tony Blair during his time as Prime Minister. If his involvement indicates that we are about to return to that golden era, it will be long past time.
I am sure that Matthew Taylor will be able to build a consensus between the various parties that he has served over a period of time. As the noble Lord knows, Whips do not speculate about how they go about their trade. The reasons for the decision were as I set out in the Statement some 20 minutes ago.
I thank the Minister for his very clear statement about the continuing commitment to social care additional funding, but will he give us an equally clear and unequivocal statement to satisfy lots of worried people in local government that he will not be raiding existing funding for local government in order to offset the social care funding that has been provided?
My Lords, there is an air of inevitability about this decision today. We have seen it built on the folly of those manifesto commitments referred to by the noble Lord, Lord Higgins. There is another issue that has run through lots of Budgets, which is the internal process of government and the checks and balances that are applied to Budgets, which are much weaker than one would see in most legislation. Anyone producing a Bill in government has to go round every department getting input into it, and there is challenge. That process irons out some of the problems that we have seen emerge not only in this Budget but, to be fair, in previous Budgets and announcements as well. On the specific commitment today about no changes to class 4 contributions, does that apply to the basis of calculation of thresholds as well as the rates?