Philip Hammond ditched plans to increase national insurance contributions for the self-employed yesterday, in a humiliating U-turn just a week after the measure formed the centrepiece of his first budget.
The chancellor signalled the abrupt change of heart in a letter to Conservative MP Andrew Tyrie, the chair of the treasury select committee, following a revolt by backbench MPs that Hammond had proved unable to quell.
Both the Treasury and No 10 insisted the decision, which leaves a £2bn hole in the chancellor’s budget plans over the next five years, had been taken jointly by May and Hammond.
But at Westminster on Wednesday night some MPs insisted May had ordered her chancellor to drop the plans, fearing that breaking the party’s manifesto pledge to make “no increases in VAT, national insurance contributions or income tax”, would do too much damage to the Conservatives’ reputation.
Class 4 NICs, the rate paid by self-employed people, were due to rise from 9% to 10% next April and 11% in 2019, to narrow the gap with employees, and prevent the tax base being eroded as self-employment becomes more widespread.
Hammond continued to defend the policy, which he said would have helped to address the fact that the self-employed pay less tax than employees, despite receiving many of the same benefits, including, from April next year, the same access to the state pension.
But he conceded the NICs rise breached the “wider understanding of the spirit,” of the Tory manifesto.
“The government continues to believe that addressing this unfairness is the right approach,” he said. “However, since the budget, parliamentary colleagues and others have questioned whether the increase in class 4 contributions is compatible with the tax lock commitments made in our 2015 manifesto,” he said.
In the Commons shadow chancellor John McDonnell urged him to apologise to the self-employed.
“This is chaos. It is shocking and humiliating that the chancellor has been forced to come here to reverse a key budget decision announced less than a week ago. If the chancellor had spent less time writing stale jokes for his speech and the prime minister less time guffawing like a feeding seal on the Treasury bench, we would not have been landed in this mess.”
He added: “Nobody should be too arrogant to use the word ‘sorry’ when they blunder so disastrously.”
A cross-section of Conservative MPs, from the centrist Nicky Morgan to arch-Brexiteer Jacob Rees Mogg, stood up to offer their support for the chancellor – but some loyalists questioned why they had spent the week defending the controversial policy, only to see it dropped.
Desmond Swayne, Conservative MP for New Forest West, asked the Speaker, John Bercow, if he could raise a point of order, saying, “as a slavish supporter of the government, I am in some difficulty. My article for the Forest Journal, robustly supporting the chancellor’s earlier policy, is already with the printer … Having been persuaded of the correctness of the course that the chancellor is now following, I merely needed an opportunity to recant.”
Ann-Marie Trevelyan, a backbench MP who had raised concerns about the NICs rise, told the Guardian she welcomed the chancellor’s change of heart: “My leaflets had ‘no tax rises’ on them. That’s political capital we would never get back, and we are the party of sensible taxation.”
Hammond made clear that it was the charge of breaching a manifesto commitment that had made up Downing Street’s mind. “This government sets great store in the faith and trust of the British people,” he said.
Earlier the measure had dominated PMQs. Jeremy Corbyn said: “It seems to me that the government are in a bit of chaos here” – though he then frustrated some of his own backbenchers by switching tack to focus on education.
Angus Robertson, the SNP’s leader at Westminster, said: “We once had a prime minister who said, ‘The lady’s not for turning’ … My goodness.” He went on to welcome what he described as May’s “screeching, embarrassing U-turn on national insurance contributions”.
However, not all Conservatives were happy with the decision, which raised questions about the Conservatives’ authority to press ahead with controversial tax-and-spending decisions with a narrow parliamentary majority.
Ryan Shorthouse, director of Conservative thinktank Bright Blue, said: “It was perfectly reasonable and justifiable to narrow the gap in the contributions made by the self-employed and employees to the public purse.” He added that any spare resources should be devoted to Britain’s poorest families.
“The finances of the lowest earners in this country – whom the prime minister has described as ‘just about managing’ – are being hit by the the ongoing and deep cuts to in-work benefits in this parliament, introduced by the last chancellor. The focus of government should be softening these cuts, not reversing the class 4 NICS rise.”
Hammond promised to make no increases to NICs for the rest of this parliament; and said the government would widen the scope of a planned review into whether the self-employed should receive better paternity rights, to include other benefits too.
May opened the way to the U-turn on Thursday night at a press conference in Brussels after the European Council meeting, when she defended the principle of the NICs rise, but said the government would not legislate on it until the autumn.