National insurance rise: Ian McConnell: Old habits die hard for ham-fisted Tories

It has been impossible this week as the Tories have unveiled huge tax hikes which will be a major burden on so many and particularly younger workers and retired people – centred on national insurance but extending to dividends – not to draw a parallel with 2010.

Back then, we had an economy in the early stages of a recovery from a devastating global financial crisis. The previous Labour administration had done much right on the way out of the depths, with Alistair Darling as chancellor having opted shrewdly for an emergency temporary cut in value-added tax. He did this after he and then prime minister Gordon Brown had implemented an impressive scheme to ward off a complete banking sector collapse.

Then the Tories won the 2010 general election and, propped up by the Liberal Democrats, decided that austerity was the way forward. The temporary VAT cut, from 17.5 per cent to 15%, had been reversed by the time they took power in 2010. However, this was not enough for the Conservatives and they hiked VAT from 17.5% to 20%.

It was a foolish move, taking money out of people’s pockets at a time when consumer spending was so important to recovery. It was also a regressive tax move, hitting hardest those who have to spend all or most of their incomes to live.

Of course, the Tory austerity went much further, with savage welfare cuts amounting to many billions of pounds per annum. We also had the ending of universal child benefit.

Not surprisingly, given the dismal cocktail of utterly ill-judged policies, the UK economic recovery never really got going. George Osborne’s vision of “a Britain carried aloft by the march of the makers”, laid out by the former chancellor in his March 2011 Budget, failed spectacularly to materialise.

Then former prime minister David Cameron made the foolish decision to have a referendum on European Union membership and the summer 2016 Brexit vote has ensured, for years ahead of the coronavirus pandemic and since, that the UK economy has been dragged down further.

The Tories have accumulated quite the collection of mistaken and deeply damaging economic policies.

After the pandemic took hold, there seemed to be some albeit woolly noises emanating from senior Conservative ranks about how austerity would not be the way ahead this time round.

And Prime Minister Boris Johnson appeared to signal a belief that austerity had been the wrong choice last time.

Talk is one thing though and there have been plenty of signals throughout that the Tories would revert to instinct and their old ways and obsess about how to tighten back up the loosened purse strings. The strings have had, of course, to be loosened amid the pandemic to fend off an economic catastrophe, through crucial measures such as the coronavirus job retention scheme.

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Even though this scheme was of the Conservative Government’s own making, there were sounds from senior Tory ranks only weeks after the programme was launched last spring that indicated a discomfort with providing such support.

In early May last year, a senior UK Government source was quoted as saying: “People are addicted to the scheme. We’re not talking about a cliff-edge but we have to get people back to work.”

Chancellor Rishi Sunak then tried to end the furlough support scheme on October 31 last year but was overtaken by reality. The coronavirus job retention scheme is now due to end this month, which remains a huge worry. After all, the international travel sector is still weighed down by rules and restrictions and unable to operate anywhere near normality and many other businesses are still finding their feet.

What seems clear is there has been an impatience all the way along to tighten those purse strings.

The Conservatives have indicated throughout a temptation to take big action to, as they seem to see it, get the public finances in order.

However, they seem to continue to fail to grasp the obvious point that fiscal measures which reduce aggregate demand and cut growth and therefore personal and corporate tax revenues will be counter-productive.

If anyone has any doubt about this, they should take a look at what the Conservatives’ austerity programme in the wake of the global financial crisis did to the public finances.

The Conservatives propelled the UK’s public sector net debt from £1 trillion in 2010 to £1.8 trillion, just ahead of the coronavirus pandemic hitting.

With their £12 billion per annum tax grab announced this week, affecting workers and employers in terms of the national insurance contributions element, it seems the Tories do not have their eye on economic growth or recognise the importance of this to overall revenues for the Exchequer.

Responding to news of the increase in national insurance contributions (NICs) for employers, employees and sole traders and the rise in dividend taxation, Federation of Small Businesses national chairman Mike Cherry said: “These hikes will have business owners and sole traders feeling demoralised at the point when they’re trying to recover from the most difficult 18 months of their professional lives. For those thinking about starting up, they send completely the wrong message.”

His point about the move leaving many “demoralised” is well made, especially given the grim situation businesses and households alike have had to endure since the spring of last year.

Mr Cherry added: “Business owners who have done all they can to retain and support their staff during the pandemic are now being punished for that loyalty with an £11bn increase in NICs, which essentially serve as a jobs tax.

“This regressive levy hits employers and sole traders without meaningful regard for how their business is performing.

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“This increase will stifle recruitment, investment and efforts to upskill and improve productivity in the years ahead. At the same time those running companies, many of whom were left out of pandemic support measures, face a fresh assault on dividend revenue.”

The Conservative Government should heed these crucial points, but it appears highly unlikely that it will do so.

Obviously, the tax grab is also highly detrimental from a societal perspective. The hike in national insurance, whether the new element is called a health and social care levy or not, goes against a manifesto promise. It is regressive, and among those hit hardest will be younger people in the workforce. So much for the intergenerational fairness narrative. And anyone who has followed Tory policy-making over many years now will not be surprised to know that the national insurance hike will be a major burden for lower-income households in general.

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The Tories have had quite a week. We have also had from the Conservative Government an extraordinarily detrimental decision to suspend the “triple-lock” safeguard which has guaranteed that the state pension will rise every year by the highest of annual consumer prices index inflation, pay growth, or 2.5 per cent. The rise will, under the changes announced this week, for the 2022/23 financial year be based on either 2.5% or inflation. So the guarantee that the state pension will keep up with earnings growth has gone, at least for now.

The Tory spin on its national insurance and dividend tax grab this week is that it will enable a £36bn investment in health and social care over the next three years. In a Scottish context, health and social care are devolved.

However, the bottom line is that the Conservatives have made a decision to raise taxes, pure and simple.

The UK Government has thankfully, given the prevailing backdrop in financial markets, been able to borrow very cheaply. This gives room for manoeuvre, and at the very least time for recovery to become embedded before rash tax rises, but the Tories look to be champing at the bit to go back to their old habits.

The Tories’ blinkered attitude, and failure to learn from the mistakes of the past were summed up this week by Mr Johnson’s comments on the decision to hike tax to fund his planned health and social care “investment”.

He told Parliament: “It would be wrong for me to say that we can pay for this recovery without taking the difficult but responsible decisions about how we finance it. It would be irresponsible to meet the costs from higher borrowing and higher debt.”

Higher borrowing is not ideal but we are in a situation in which economic recovery looks like it will be a very long, hard slog. Taking large amounts of money out of people’s pockets through the package of measures announced this week bodes very badly for aggregate demand. The suspension of the triple-lock on state pensions will also mean people will have less money than they would have had, and could prove a major drag on the economy and society if it becomes permanent, with a massive compound effect over years and decades.

The decisions announced this week, especially given the Tories should have learned from their relatively recent failed austerity, do not look responsible at all from an economic stewardship perspective.