Bill Jamieson: Philip Hammond needs a lesson in basic economics

What possessed him? The chancellor's effective tax hike on the self-employed has emerged as by far the most contentious measure in an otherwise cautious and anodyne budget. And opposition to it is growing across the country.

Philip Hammond may have succumbed to a statistical blindness. Photograph: Getty Images

Nearly 2.5 million self-employed people will see their national insurance bills rise by up to £1,000. The two percentage point NI hike by from nine per cent to 11 per cent in 2019 will hit small traders, home workers, IT fixers and advisers, builders and maintenance workers, hoteliers, restaurant owners, cafe bar proprietors, bed and breakfast managers, and the army of those providing outsourced services for tens of thousands of larger businesses.

It may have been that “Spreadsheet Phil” succumbed to a statistical blindness: that when everything is reduced to Treasury numbers on revenue flows, the gap between the NI revenues from salaried employees and the self-employed looked like an anomaly in need of correction. Who could dispute that such a gap, looked on the face of things, to be inappropriate and unfair?

But there is a world of difference between the two in real life. Employees receive pension contributions of £1,280 – based on a worker earning £32,000 a year; holiday pay of £3,273; £2,471 statutory sick pay and redundancy pay (based open 20 years’ service) of £9,101.

A self-employed worker receives none of this. And in addition, the self-employed have to bear the risks of starting and running their own business, of having to raise finance and be a jack-of-all-trades – from keeping the accounts to marketing and promotion and being their own IT problem fixer. This is not an anomalous gap on a statistical spreadsheet: it is a gulf separating two separate worlds of work and endeavour.

Arguably as worrying for the self-employed sector as the immediate hit was the line in the Budget speech indicating that further action was likely to further narrow the difference in NI treatment between salaried workers and the self-employed, with further study being undertaken. That casts a dark cloud over future cash flow planning and business funding. And this is coincident with a marked slowdown ahead in consumer spending on which many owner-managed businesses depend on future growth.

Scotland, just as much as the rest of the UK, has experienced a surge in self-employment over the past eight years. Many of these comprised people shaken out of salaried employment as companies retrenched in the wake of the 2008-09 financial crisis. Others, taking early retirement, needed to augment their pension income.

But a host of others saw self-employment as the fulfilment of a dream to build their own business and be their own boss.

It is tempting to regard the typical self-employed as a techno geek hunched over a laptop, supping a flat white latte in London’s Clerkenwell Road and with no more stress and strain than tapping a set of iPad keys. But research released last week from the Federation of Small Businesses (FSB) revealed a more telling and comprehensive picture: small firms in rural Scotland are likely to be hit hardest by the chancellor’s move to hike taxes on the self-employed.

Towns such as Newton Mearns, Aberfeldy and Callander have more than 11 per cent of their workforce self-employed. In West Linton, Comrie and Killearn the percentage climbs to more than 14 per cent. And in Ullapool and Newtonmore the proportion climbs to more than 17 per cent.

Andy Willox, the FSB’s Scottish policy convenor, says: “The chancellor’s 
£1 billion tax hike on those who work for themselves is the wrong move at the wrong time. Not only does it undermine the chancellor’s plan for the UK to be the best place to start and grow a business, it puts at risk the success of small town Scotland. Many of the self-employed are people on relatively modest incomes – without the benefit of things like paid holidays and sick leave.”

The chancellor, he added, “should rethink this wrongheaded move”.

The Treasury appears concerned that the rise in the numbers of the self-employed in recent years would reduce the tax take from what otherwise would have been the case. But that is to overlook the economic benefits this brings – not least a more dynamic and responsive business base, and a growing number of entrepreneurs prepared to take risks.

And after all, it has been Conservative ministers since 2010 who have extolled the virtues of self-employment and indeed gave full throttle support for the Start-Up Britain campaign – from Downing Street down. And it is the growth in start-ups and self-employment that helps to explain why today we have the highest numbers of people in work on record.

From long hours in the tourist sector to undertaking myriad tasks in building and construction: the reality is that self-employed workers account for a significant proportion of small and medium sized businesses (SMEs). A timely Economic Imperative Report from the Royal Society of Arts last week reminded us that SMEs represent 99 per cent of UK businesses, employing 15.7 million people. They have a combined turnover of £1.8 trillion and play a vital role in the economy: they innovate and boost competition in markets that might otherwise become stagnant.

This is the universe to which economies look for enterprise, innovation and growth. If the spreadsheet anomaly so irked him, better, surely, that the chancellor looked to cutting the tax burden on salaried workers rather than raising the tax take on the self-employed. It smacks of a fundamentally wrong-headed view of what really drives economic growth: not the constant effort to drive up tax to fund the activities of government but as much as possible to contain the tax burden and allow workers and businesses to fund activity and growth.

It is through this that jobs are created and in time higher spending to increase government revenues. How else, to echo a phrase in Hammond’s budget speech on Wednesday, do we go about “preparing Britain for a brighter future”?

Is it really necessary to spell out such a basic lesson in economics to a Conservative chancellor? Sadly, the answer seems to be “yes”. If it was not an unfortunate episode of statistical blindness, what on earth could have possessed him?