Confusion reigns over how to regard Britain’s nearly 5 million self-employed, a number that has doubled over the past 20 years. Are they the heroic backbone of a flexible, innovative economy, driving employment and productivity growth, with the added, morally admirable quality of looking after themselves? Or are they the victims of a modern capitalism that is ruthlessly shifting risk on to ordinary people who can ill afford to bear it?
The trouble is that both propositions have some truth, with the second nearer the mark than the first. But there is sufficient ambiguity to make developing sane policy towards the self-employed a political nightmare. For the “true” Tory, these are entrepreneurial heroes, even if the long-run fiscal consequences are disastrous and many of those heroes are desperately poorly paid part-timers doing menial work with minimal job security. Labour’s instinct is that the heroism is restricted to a minority and most self-employed are more victims of the system than its exemplars. But even if Labour is right, few of the self-employed are going to listen. This is a new and fast-growing Conservative constituency.
Into this minefield wandered the normally ultra-safe pair of hands of the chancellor, Philip Hammond, last week proposing a modest, progressive increase in the national insurance contributions paid by the self-employed while abolishing the £2.85 per week flat-rate contribution paid by those earning less than £16,250. These lower earners would then be better off.
Thus he would raise a useful net £200m in the fairest possible way, but more importantly, unlike the craven refusal to revalue domestic property for 26 years so creating a fiscal mess, he would begin to acknowledge that Britain’s structure of NICs is a major driver in the growth of self-employment. An employer who can persuade a worker to become a self-employed contractor immediately saves paying 13.8% national insurance, while the newly self-employed contractors’ payments fall from 12% to 9%.
Leave the system untouched and, as now with the domestic property revaluation, it would soon become politically impossible to do anything. For another doubling in self-employment in the next 20 years would force such high and unfair compensating increases in NICs and income tax on normal employment that we would enter a self-reinforcing vicious circle: Britain’s entire social contract could unravel.
If you care about the “just about managing families” and expect to be in power for the next 10 years or more, a racing certainty as matters stand and central to the Hammond/May world view, this is a prospect to be avoided. There are many democratic disadvantages to having a parliamentary opposition with a near zero chance of ever forming a government, but one advantage is that it forces the incumbent government to take a longer-term view. The Conservative party has every chance of being in power in 2030. Hammond is trying to insulate his party from a fiscal and social debacle, even at the price of breaking a manifesto commitment. “Spreadsheet” Phil, and his no less cautious prime minister, would take the obvious political flak only if they thought the price had to be paid. Mrs May was careful in her attempt to defuse the row, promising a review of the whole employment landscape but not the complete rescinding of the increase.
The growth of self-employment in Britain is one of the great economic and social realities of our time. On current trends, there will soon be more self-employed than public sector workers. These include nearly 1 million in the so-called gig economy. Their position is structurally insecure. Not only are they dependent on a contract for work being renewed, sometimes weekly or even daily, but around 80% earn less than £15,000 a year, two thirds of the median wage. Worse still, their pay has been falling, on average by an astonishing £100 a week between 2006/7 and 2013/14. The number struggling with debt has exploded.
The impact on poverty is masked because so many people, especially women, are second earners in households where the principal earner enjoys full-time employment rights (holiday, sickness and pension entitlements) and some continuity and stability in both work and pay. A sixth of the self-employed are also pensioners, perhaps trying to supplement their pension income. These are plainly people who are just about managing, but whose capacity will weaken the more self-employment and poor personal pensions become the norm. What they are not is a new wave of entrepreneurs about to relaunch the British economy.
It is true that there is a category of self-employed, under 2%, who earn more than £100,000 and whose incomes have been rising. But as both the Resolution Foundation and Institute for Fiscal Studies point out, they are more than capable of shouldering a small increase. More importantly, by closing the gap between what a self-employed and a full-time employee pays in NICs, the incentive to become a self-employed contractor is reduced. With the law tightening, there is a chance that self-employment becomes more of a bona fide choice rather than a fix to avoid paying what is seen as a tax – and the loss in revenue partly staunched.
Even so, self-employed numbers will increase, and with them ever harder questions will be posed about how Britain’s public services are to be financed. If income tax, national insurance and VAT increases are politically blocked, if no revaluation of domestic property can be countenanced and if the only direction in business taxes is down, then the whole edifice – from pensions to universal free education and health – starts to crumble.
For right-of-centre Brexiters, the point of Brexit was to necessitate this low-tax universe with the obvious consequences for all forms of public spending, a reason why their voices are so loudly critical of the “rookie” chancellor who, as they see it, has betrayed a concept of Toryism.
May and Hammond, talking of fairness, an industrial strategy and a sharing society, represent a very different Tory tradition, even if both sides are hitched to the act of national self-harm that is Brexit. The row over NICs is the first shot in what will be a long and protracted battle for the soul of Conservatism, and the future trajectory of Britain post Brexit, a battle that will be even more bitter because there is no need for unity before today’s enfeebled Labour party. The very right wing is confident it will emerge on top. How this row ends will show if it is correct.
