The Chancellor said the government would no longer be increasing national insurance contributions for the self-employed, admitting that the proposal broke the spirit of a 2015 Conservative manifesto pledge not to raise taxes.
In a sign of the danger faced by a government with a working majority of just 17, Conservative backbenchers scored a major victory after voicing their anger at plans to tax independent tradesmen and entrepreneurs.
The scrapped tax rise leaves a £2 billion hole in a budget that the Chancellor had last week touted for not increasing public borrowing. Mr Hammond pledged to bring forward proposals to fill that gap in the autumn.
In a letter to MPs yesterday morning, Mr Hammond said it was “very important both to me and to the Prime Minister that we are compliant not just with the letter, but also the spirit, of the commitments that were made.”
The Chancellor said that a ‘tripe-lock’ put into legislation in 2015 made clear that Class 1 national insurance for employees would not rise, but did not mention Class 4 national insurance.
But Mr Hammond added that “in light of the debate over the last few days it is clear that compliance with the ‘legislative’ test of the manifesto commitment is not adequate.”
A review by former Tony Blair adviser Matthew Taylor, the chief executive of the RSA, will now consider the ways in which employees and the self-employed are treated differently by the tax system, as well as looking at whether benefits like paid parental leave should be extended to the self-employed.
Announcing the decision at Prime Minister’s Questions, Theresa May insisted: “We made a commitment not to raise tax, and we put our commitment into the tax law. The measures we put forward in the Budget last week were consistent with those locks.”
She added: “As a number of my parliamentary colleagues have been pointing out in recent days, the trend towards greater self-employment does create a structural issue in the tax base on which we will have to act. We want to ensure we maintain fairness in the tax system.”
SNP Westminster leader Angus Robertson described the move as a “screeching embarrassing U-turn” to cheers from MPs.
Invoking Margaret Thatcher’s famous phrase, he said: “We once had a prime minister who said that the lady is not for turning. My goodness.
“Isn’t it welcome that the Prime Minister today has admitted she is for turning with her screeching embarrassing U-turn on National Insurance Contributions.”
At PMQs, Labour leader Jeremy Corbyn said the climbdown had left “a black hole in the Budget” and called on the Prime Minister to apologise to the country, telling the House of Commons: “It seems to me like a Government in a bit of chaos.”
However, despite catching the government on the back foot, Mr Corbyn was accused by critics of failing to exploit Mr Hammond’s weakness.
Mr Blair’s former spokesman Alastair Campbell tweeted: “Unless the Corbyn team actually planned for that to be a car crash the inquest should be long, hard and honest. He just can’t do it.”
The decision was made by the Chancellor and the Prime Minister at 8am, and was not discussed at cabinet on Tuesday. Conservative MPs were still defending the policy right up until the announcement was made public, 20 minutes before PMQs.
International development minister Rory Stewart was interrupted live on the BBC while speaking in support the national insurance rise to be told of the government’s u-turn, while back bencher Sir Desmond Swayne complained in the Commons that a newspaper article defending the policy had just been sent to printers.
“The Prime Minister and Chancellor have heard what colleagues have had to say in recent days and they have taken the decision that has been announced to Parliament at the first opportunity,” the Prime Minister’s spokesman said. “They wished to reflect the spirit of the manifesto.”
The spokesman said Mrs May continued to have full confidence in Mr Hammond and had no concerns about his judgment as Chancellor. He added that all budget spending commitments will be met, including increased spending on social care and skills which were to be partly paid for by the tax rise.
Facing Mr Hammond in the Commons later, shadow chancellor Mr McDonnell said: “This is chaos. It’s shocking and humiliating that the Chancellor has been forced to come here to reverse a key Budget decision announced less than a week ago.
“If the Chancellor had spent less time writing stale jokes for his speech and the Prime Minister less time guffawing like a feeding seal on those benches, we would not have been landed with this mess.”
The Chancellor was heckled during his statement by opposition MPs, with Labour’s Yvette Cooper making the most of Mr Hammond’s announcement that spring budgets would be abolished from this year onwards.
“The Prime Minister has just done a £2 billion Budget U-turn in the space of about a week,” she said to cheers. “Last year the Government did a £4 billion u-turn in the space of five days. Is that why they want to abolish spring budgets? Because they just keep ripping them up?”
Downing Street declined to speculate on whether the Chancellor would choose to raise other taxes or cut spending but ruled out additional borrowing by saying that the government remained committed to ensuring the country “lives within its means”.
Stephen Herring, the head of taxation at the Institute of Directors, said: “The whole National Insurance saga can only be described as chaotic. The irony is that there are good reasons to look at levelling the playing field for employees and the self-employed, as the tax on direct employment is disproportionally higher.
“However, it would have been much better if, as the IoD had suggested, the Government had waited for the conclusions of its own review of modern employment, and reformed wholesale how different forms of work are taxed. Instead they announced they would raise one tax in isolation, only to cancel it a week later.