The Chancellor’s proposals on National Insurance have produced opposition from many quarters, including from the most dangerous of all – his own back benches.
How did the Chancellor end up here? At first glance, this looks like another “pasty tax” – an ill-thought-through measure that the Treasury suckered a Chancellor into announcing. And one that he will quickly come to regret.
There is some truth to the comparison. Both measures have their roots in the same intellectual culture which predominates at the Treasury. This emphasises “tax neutrality” – that the taxation of similar things should be the same. This implies that the taxation of pasties should be the same as that of other food, and that the taxation of employment and self-employment should be as similar as possible.
This view is not just a matter of opinion – there are strong and well-tested academic arguments in favour of it. And it is not about the level of taxation – this can be high or low, the important thing is that it is the same. Having worked both at the Treasury and at the Institute for Fiscal Studies (IFS), I’ve certainly argued for tax neutrality many times.
But like many intellectual arguments, tax neutrality can often fail to engage with real-world politics. People don’t see the world through the lens of tax economics, and they never will. Despite all its intellectual rigour, any “Fiscal Neutrality Now” political party is unlikely to beat even the Monster Raving Loonies. A political case that is based solely on neutrality arguments is bound to fail.
Of course, for the public finances, the way we tax pasties is neither here nor there. George Osborne dropped this measure with few further consequences, except for his own reputation.
But how we tax work really matters, and it is obvious that the way we work is changing. As people are increasingly self-employed or working through their own companies – both of which are more lightly taxed than working for an employer – then the tax take will fall. In the small circles of people working on taxation, this has been a growing concern for a number of years.
So unlike the pasty tax, which was a short-term tactic to make the numbers add up, the changes to National Insurance are a response to a long-term strategic issue. They will have been thought through carefully, and everyone involved will have been very conscious that there was opposition ahead. Unlike his predecessor, who ducked the issue (and indeed through various policies made it worse), Philip Hammond has tackled it head on.
Again this is very much part of the Treasury culture. There are special rules around Budgets, which override the normal need to get political consensus. The Chancellor informs his colleagues of the content of the Budget, rather than having to agree it with them. The idea is that the Chancellor faces a uniquely difficult job – to extract money from angry taxpayers – whereas his colleagues get the easy task of spending that money on things the public wants.
The traditional Treasury approach is a form of shock and awe – the back benches and the public learn about the issue and the solution at the same time, and the power of the Treasury and the whips will see the government through. This may well appeal to Mr Hammond, a politician who prides himself on resolving the MoD’s chronic overspending despite the many ruffled feathers in the military.
However, with more independent backbenchers, and far greater media scrutiny, it is an approach that is becoming more and more difficult to maintain – as this latest conflict shows.
The Chancellor might be better advised to take the very different approach – one used to address the consequences of an ageing population for the cost of the state pension.
Against the wishes of the Treasury, Tony Blair set up the Pensions Commission in 2002, which independently and publicly went about establishing the problem. It also highlighted that three groups – people themselves, their employers and the government – should all contribute to the solution. This approach is not quick – the review took three years – but it did allow a serious discussion on a serious issue.
The Chancellor actually has a lot of the building blocks for such a debate. There is a review under way already looking at the consequences of changing work patterns. And there are issues, like access to benefits and acceptable working practices, which could make sure the solution did not involve the self-employed bearing all the cost themselves.
The Institute for Government argues, alongside the Chartered Institute of Taxation and IFS, that the Treasury needs to better prepare the ground for reform. There is little choice but to engage the public better and earlier.
Julian McCrae is deputy director of the Institute for Government