Pasties, grannies and caravans – just three of the controversial targets of tax hikes from George Osborne as he tried to raise funds and, as he saw it, simplify elements of the tax system. But they often backfired, none more so than in the 2012 Budget which led to a series of blazing rows and was later nicknamed the ‘omnishambles budget’. Mr Osborne learned from his mistakes and tried to avoid causing uproar with relatively small tax changes which had been aimed at ironing out kinks in the tax system.
His predecessor Philip Hammond has failed to take those lessons into his first full Budget, Scrapping his planned hike to national insurance contributions for self employed workers – within a week of its announcement in the Budget – ends the controversy over the measure. But this has created a £2bn gap in the public finances over the next five years which he now has to fill.
The Chancellor cancelled the tax hike because it broke a Conservative manifesto pledge from the 2015 election, but now he is in a sticky spot because last week he promised that his new spending plans would not raise borrowing. If he does not find a new tax to hike or an alternative piece of expenditure to cut, he will break that promise. How he will achieve that is something of a mystery.
Mr Hammond has decided to hold off telling the public for now. Instead of shuffling his spreadsheets immediately, he will only reveal his plan in the autumn Budget, meaning the hole will not the plugged until at least eight months into the coming financial year. The rationale for this is shifty. The Treasury clings to the idea that fiscal policy should only be changed in Budget announcements, trying to ignore the fact that this u-turn is exactly such a fiscal change. But the politics are clear: Mr Hammond does not know where to find the cash.
If he thought this would make the political pressure disappear he may be mistaken – now the lobbying begins by groups who want to give him their plans. First out of the blocks was the Association of British Insurers, whose members have been clobbered by a rule change which presents them with an extra bill for personal injury payouts. The reduction in the Ogden Rate – the discount rate used to calculate payouts to seriously injured customers – has imposed costs of hundreds of millions of pounds on some insurers.
Importantly for the public finances, it also imposes a large cost on the NHS as it affects the sums it pays to victims of clinical negligence. “The Government can fill the void in its accounts from today’s NICs u-turn by bringing in a more sensible discount rate used to calculate personal injury compensation,” said James Dalton at the ABI. “As last week’s Budget confirmed, the ill-judged decision to reduce the discount rate to minus 0.75pc will lead to a massive £6bn hit on the NHS so this seems an obvious course of action to take.”
Meanwhile groups working with the self employed are worried that they are still in the firing line, as Mr Hammond spent a large chunk of his Budget speech arguing that they are under-taxed relative to employees.