13 March 2017

This time last week, Philip Hammond would have been looking forward to his first (and last) Spring Budget. Its reception may convince him to cut the jokes, but Jill Rutter argues the real lesson is that he needs a better way of making Budgets. 

One interesting insight from last week’s Budget troubles is that no one in the Cabinet appears to know what was in the 2015 Conservative manifesto. Another might be that Treasury officials need to be more aware of the tax status of journalists.

A YouGov poll at the weekend suggests that the public overall bought the fairness argument around national insurance contributions (NIC), and that was particularly true of Conservative voters (67% of whom thought it was a good idea versus 24% who thought it was the wrong priority).

So why has a move that represents sensible tax policy – as many “experts” have argued – proved such toxic politics? Would a different way of making tax policy have helped with the political problem?

The Chancellor’s bad timing

Philip Hammond’s first problem was the Conservative manifesto commitment – memorably labelled the “dumbest economic policy ever” by David Cameron’s former head of strategy, Ameet Gill – which the Treasury then translated into law on a narrow interpretation.

His second problem was that his predecessor, George Osborne, had already announced the good news – the abolition of the flat-rate Class 2 NICs – so his changes were unalleviated bad news. Added to that, all the Budget giveaways had been pre-briefed, leaving nothing else to report on the day.

The Chancellor’s third problem was that although he announced in the Autumn Statement that he would consult on changes to the tax treatment of the self-employed and incentives to incorporate, this was mostly done behind closed doors and not as part of the wider review of new forms of employment. A comprehensive review would have enabled issues to be looked at in the round for tax (though not spending) that requires a clear policy decision. The one problem with waiting was that the Office for Budget Responsibility would not have allowed the Chancellor to score any revenue.

A better approach

In our report Better Budgets, we note the repeated problems with Budgets come from the exceptional processes they go through. No strategy, no preparation of the ground for significant changes and no collective discussion as the Treasury refuses to release tax policy from its iron grip. If the Chancellor (and his predecessor) had followed the approach we set out, it might have looked more like this:

Stage 1: a review ranging widely over new forms of employment, assembling the evidence base on all the issues

Stage 2: public consensus building on a strategy for reform, based on a clear diagnosis of the issues – including cross-party conversations – to develop a fair and acceptable way forward

Stage 3: translating that consensus into a joint approach by the Treasury and the Department for Business, Energy and Industrial Strategy on the future of work, covering both tax and employment rights, and a roadmap for reform, agreed by the Cabinet

Stage 4: specific policy proposals as part of a clear reform roadmap.

None of this is exceptional. It worked for pensions in the noughties – and done well, it could have worked on this.

More haste, less speed

An anxious Chancellor might have said this was too slow and laborious a process, but it would have had a much better chance of delivering long-term reform.

The Treasury has known it needs to tackle the erosion of the tax base from increasing self-employment and incorporation for some time. It may yet manage to salvage something from its bad timing. But its overhasty approach risks setting the course of necessary tax reform back for years.

The other thing to salvage is Philip Hammond’s political reputation. A more open approach to Budget making is the way forward.

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