In scrapping the proposed tax rise for the self-employed, Philip Hammond bottled an opportunity to get to grips with a changing labour market
Philip Hammond’s announcement in last week’s budget that he would raise National Insurance contributions (NICs) for the self-employed was savaged from the start, seen in particular as an attack on male drivers of a certain vehicle of a certain colour.
“Hammond hits White Van Man,” declared the Metro the following morning, while the Sun screamed: “Spite Van Man”.
Yet there was discontent among Conservative MPs, and accusations of breaking the Tory manifesto pledge not to raise NICs (although if the government has no mandate to raise NICs it presumably does not have one to leave the Single Market).
Hammond U-turned. Yesterday he told MPs in a Commons statement: “There will be no increases in National Insurance rates in this Parliament.”
The WVM plays an important role in political symbology: it represents the salt-of-the-earth, no-nonsense, skilled working-class, which is the socio-economic group regarded as decisive in election results. It is also a core part of the ‘just about managing’ which Theresa May has vowed to help.
However, to portray the NIC rise as simply being about the WVM losing out is misrepresentative.
Not a class of their own
Those who are self-employed pay two types of NICs: Class 2, which is a flat rate paid by workers who make over £5,965 a year in profit; and Class 4, which is a proportion of profits paid when workers make over £8,060 a year.
For the self-employed the rate for Class 4 is 9 percent, compared to the 12 percent paid by employees. This was set to be hiked up to 10 percent in April 2018 and then to 11 percent in 2019.
George Osborne announced last year that Class 2 contributions will be abolished from 2018. The combined effect of this and last week’s proposed change would have meant that that those earning under £16,250 would still not have lost out from the changes.
According to Torsten Bell at the Resolution Foundation the typical earnings of a self-employed person is just under £14,000, meaning over half would have been better off or unaffected, including two thirds of self-employed women. Bell also said that over half of the overall tax increase was set to fall on the richest 10 percent of households.
When taking Hammond and Osborne’s changes together, a more nuanced picture of winners and losers emerged.
Furthermore, using the WVM to represent the self-employed is misleading in itself, given that skilled workers make up a minority of that group. According to Citizens Advice, managers, professionals and associate professionals now make up nearly half of all the self-employed.
Not only that, but these groups saw some of the highest percentage increase in the number of self-employed from 2004 to 2014.
Act now, save later
The overall amount raised by the treasury from this change would have been miniscule: according to the Chancellor, £145 million a year by 2021-22.
However, the tax base should be secured now before such a change becomes more contentious politically. According to the ONS, the growth in the number of self-employed workers has been prolonged. From 3.275 million self-employed workers (12 percent of all workers) at the turn of the century, there were 4.695 million (14.9 percent) at the beginning of last year.
The ONS believes many workers become self-employed as they transition out of the labour market, working part-time before full retirement. For this reason, it believes the growth is a structural feature of the labour market unlikely to disappear with the economic recovery (although it says self-employed younger men could actually be under-employed, so may move out of self-employment in the future).
Furthermore, new platforms such as Uber and TaskRabbit match the worker and the consumer, undercutting the companies which act as intermediaries and thus luring – or pushing – workers into self-employment.
If more and more people become self-employed as time goes on and a way to get more tax from this group is not found, the Treasury will lose out by ever increasing amounts. It will also become politically harder to raise taxes for a larger and larger segment of the electorate.
The discrepancy between the NICs paid by the self-employed and employees is justified on the grounds that the former do not get the same benefits, such as maternity and paternity leave and sick pay, and that they take more risk.
The government is waiting on a report by Matthew Taylor, a former adviser to Tony Blair, into new employment practices, due to be released in the summer. This will hopefully spur the government to give the self-employed more of a safety net, to allow them to live, prosper and take risks with less fear for the future. However, this safety net needs to be funded somehow.
(photo by Chad)
In the longer term, arguments about how to help those who are forced into self-employment or under-employment are likely to become louder in the face of more and more automation. Some 35 percent of the British workforce has a high risk of losing their jobs due to automation, according to a study cited in The Economist.
Automation is used as an argument for a Universal Basic Income (UBI), which is being tested in countries like Finland, Holland and Canada.
There is equally a case to be made that gig economy operators should take more responsibility for the people they prefer to see as partners rather than employees. London-based Pimlico Plumbers has had its claim that those who work for it are self-employed rejected in court.
Rather than represented as an attack on the WVM, the rise in NICs should have been seen in the context of an emerging problem: how to manage a more flexible but less stable workforce. The NIC rise would have been a tentative first step in finding a solution.