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Boris Johnson and Rishi Sunak have, it is reported, agreed to pay for long term reform of social care by raising national insurance by a penny in the pound for both employers and employees.

The move would raise an estimated £10bn annually.

The government is braced for unease among its backbenchers because the Conservatives promised not to raise income tax or national insurance in their election-winning 2019 manifesto.

It perhaps ought not to be too worried about that. The prime minister can always point to the crisis in social care and the need, more broadly, to repair the public finances after the COVID-19 pandemic.

The chancellor, meanwhile, can point out that one of his predecessors, Gordon Brown, did something similar in his April 2002 budget. Having pledged not to raise income taxes in Labour’s election-winning 2001 manifesto, Mr Brown broke the spirit of that promise, slapping more than 4 million workers with a 1% increase in national insurance.

The risk of breaking an election promise is the least of the problems with this proposal.

For a start, the move will perpetuate the myth that national insurance is some kind of special safety net, hypothecated to pay for pensions, unemployment benefits and other elements of the welfare state such as the NHS.

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It is remarkable how many people still believe this when, for many years, national insurance has simply been income tax by another name.

Yes, there is something called the National Insurance Fund, but essentially it is a government accounting wheeze.

The money raised in national insurance contributions is insufficient to pay for the benefits and public services that many people think they do. It just disappears, effectively, into the government’s coffers and is spent in the same way that revenues from income tax, VAT and corporation tax are spent.

Because the UK state pension system is a so-called ‘pay as you go’ system, the national insurance paid by today’s workers pays the pensions of today’s pensioners, not their own.

This misunderstanding of national insurance may be precisely why the government is proposing going to go down this route.

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The Treasury risks hurting those worst affected financially by the COVID crisis through any rise in NI contributions

Polling suggests people are happier paying national insurance rather than income tax because they genuinely appear to believe they are getting something, a benefit, for doing so.

It is why chancellors down the years have reached for national insurance as their favoured stealth tax. In 1979, national insurance receipts were equal to half of income tax receipts. This year, according to the Treasury, they will be equal to roughly three-quarters of income tax receipts.

There are also other problems with this proposal.

One is that it exacerbates intergenerational unfairness. Unlike income tax, workers of state pension age do not pay national insurance on their earnings, so the hike will fall entirely on younger workers.

Moreover, because national insurance – unlike income tax – is levied only on earnings, rather than other sources of income, such as interest on savings, the cost of this measure will fall disproportionately on younger people rather than older ones.

In other words, having made sacrifices throughout the pandemic to protect older people, younger people will again be paying through their earnings for a benefit that will benefit older people rather than themselves.

This move, then, may deepen the problems the Conservatives have with younger voters.

An explicit aim of reforming social care is to prevent people having to sell their homes to pay for such care. Younger people, unable to buy a home in the first place, may wonder why they are being asked to pay higher national insurance contributions so that others may keep theirs.

Others will criticise the lack of progressivity in this proposal.

All workers (other than those earning more than £100,000 annually and who do not benefit from the personal allowance) can earn up to £12,570 before they have to start paying income tax. By contrast, national insurance kicks in as soon as a worker has earned £9,568.

Accordingly, a wealthy pensioner living off a generous final salary pension or on income from their savings and dividends will not be paying this proposed hike, but a low-paid worker earning just £184 per week will be.

Another major problem with this proposal is the unwanted consequences it will have. Taxes, by their nature, reduce the activity on which they are levied. It is why chancellors tax smoking heavily.

Because this proposed national insurance will fall on employers, as well as employees, it will make the cost of hiring someone more expensive.

Higher payroll taxes mean fewer people in work and, potentially, lower growth. It is why, in response to Mr Brown’s national insurance hike in 2002, the then-Conservative leader, Iain Duncan-Smith, called the move a “tax on jobs”.

Gordon Brown introduced an extra tier of National Insurance in 2002
Gordon Brown introduced an extra tier of National Insurance in 2002

So, too, did David Cameron and George Osborne when Mr Brown ordered his chancellor, Alistair Darling, to announce a 1% rise in national insurance in March 2010 to pay for the financial crisis. Mr Darling had wanted to increase VAT instead. Mr Brown’s decision ensured Labour had barely any support from business in that year’s general election.

So, to conclude, what the PM is proposing is a tax increase that will disproportionately hit younger and low-paid workers while making it harder for employers to hire people.

Or, as Nick Macpherson, the former permanent secretary at the Treasury, put it on Twitter: “Rentiers and trustafarians won’t have to pay a penny. And the low paid young will subsidise the wealthy old. Higher spending does require higher taxes. But national insurance is a regressive tax on jobs.”


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Lucy Frazer rebukes Telegraph directors over removal of newspaper bosses




Lucy Frazer rebukes Telegraph directors over removal of newspaper bosses

The independent directors appointed to oversee the sale of The Daily Telegraph have been warned that the removal of the newspaper’s two most senior executives breached a government order – and that any subsequent transgression could result in a multimillion pound fine.

Sky News has learned that the Department for Culture, Media and Sport (DCMS) last week wrote to Goodwin Procter, the law firm acting for the independent board members, to say that Lucy Frazer, the culture secretary, had concluded that recent management changes at the broadsheet publisher had contravened a requirement that she must consent to the removal and appointment of Telegraph bosses.

According to sources familiar with the letter’s contents, DCMS officials said that Ms Frazer had decided not to pursue further action over the breaches, but warned that “any further breaches may lead to enforcement action, including the imposition of a penalty… [which] may be up to 5% of the total worldwide turnover of the enterprises owned or controlled by the person on whom it is imposed”.

Results for the financial year ending 31 December 2022 showed that Telegraph Media Group recorded a turnover of just over £254m – meaning that a maximum fine levied on that basis alone could amount to over £12.5m.

Money latest: What we learned about Wednesday’s budget over the weekend

The letter was sent just over a month after Anna Jones, a former Hearst UK executive, was appointed to replace Nick Hugh as TMG’s CEO.

Cormac O’Shea, the TMG finance chief, left the company just weeks earlier.

Ms Jones’s appointment also constituted a breach of the government’s Pre-Emptive Action Order, imposed last autumn, because the directors had not sought Ms Frazer’s prior approval, the letter is understood to have added.

A source close to the company said they believed that the departures of Mr Hugh and Mr O’Shea were part of the “ordinary course of business”, and were therefore excluded from the original order.

A subsequent order issued by Ms Frazer following the executives’ departures was amended to remove the “ordinary course of business” clause, the source said.

Culture secretary Lucy Frazer MP
Culture secretary Lucy Frazer MP

The culture secretary’s latest intervention is the latest twist in a convoluted process that will determine the future ownership of two of Britain’s most influential newspapers.

Ofcom and the Competition and Markets Authority have been given a deadline of next Monday by Ms Frazer to report to her on whether they believe a takeover of the Telegraph titles by RedBird IMI, a state-backed Abu Dhabi investment vehicle, would impinge press freedom.

The £600m deal is being vehemently opposed by Telegraph journalists and Conservative politicians from both houses of parliament.

RedBird IMI is minority-owned by RedBird, a US media investor headed by former CNN president Jeff Zucker, and majority-owned by IMI, which is funded by Sheikh Mansour bin Zayed Al Nahyan, the ultimate owner of Manchester City Football Club.

It has sought to defuse controversy over the deal by offering legally binding assurances over editorial freedom, and in January restructured its bid to incorporate a new UK holding company that would own the Telegraph titles and Spectator magazine.

The new entity has the same ownership structure as the earlier vehicle, according to people close to the situation, being 75% owned by IMI and 25%-owned by RedBird.

A spokesperson for RedBird IMI said at the time of its announcement: “This change was made in order to clarify the point that IMI is a passive investor in the company that will own the Telegraph and as such will have no management or editorial involvement whatsoever in the title.”

An initial public interest intervention notice (PIIN) was issued by Ms Frazer late last year which subjected a prospective debt-for-equity swap handing RedBird IMI ownership of the titles to scrutiny by competition and media regulators.

Most observers expect the culture secretary to refer the deal to a Phase 2 investigation by the CMA, which would delay its completion by months – and could lead to it being blocked altogether.

The takeover is viewed as especially sensitive because of its proximity to a UK general election in which the Tories are likely to be at long odds to win an outright majority.

The independent directors of the Telegraph’s holding company were parachuted in by Lloyds Banking Group last year after the lender seized control of the newspapers from their long-standing owners, the Barclay family.

An auction of the titles followed, drawing interest from the Daily Mail proprietor Lord Rothermere and the GB News shareholder Sir Paul Marshall.

However, the sale process was pre-empted by RedBird IMI repaying £1.16bn of loans owed by the Barclays to Lloyds, with £600m used to purchase a call option to buy the newspapers and the remainder as a loan secured against other family assets, including the online retailer Very Group.

A spokesman for the independent directors said: “It is the fiduciary duty of the independent directors to act in the best interests of the Telegraph Media Group and we will continue to do so”.

The independent directors are led by Mike McTighe, a company turnaround veteran, with the others being Stephen Welch and Boudewijn Wentink, who also have experience of corporate restructurings.

Under the terms of the public interest intervention notice (PIIN) issued by Ms Frazer, RedBird IMI is prohibited from exerting any influence over the titles while investigations by the competition and media regulators are ongoing.

The DCMS declined to comment.

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Chancellor Jeremy Hunt considering further public spending cut to boost tax giveaway in budget




Chancellor Jeremy Hunt considering further public spending cut to boost tax giveaway in budget

Jeremy Hunt is considering a last minute further cut to public spending to boost the tax giveaway in Wednesday’s budget.

The Politics At Jack And Sam’s podcast, out now, sets out how Number 10 and 11 have spent recent days finding as many different ways of raising future revenue as possible to increase the size of Wednesday’s tax cuts.

National insurance could be cut by 2p again in the budget if the chancellor succeeds in finding the right mix of revenue-raising measures and spending cuts.

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Currently, spending is due to rise 1% above inflation after next year. However, if this was cut to 0.75% above inflation, that would raise £5-6bn.

The chancellor would hope to resist questions about where he would cut, saying he is doing an efficiency drive and decisions would be outlined at a future spending review post election.

The decision on whether to cut future spending was live in the Treasury as recently as Friday, and this morning the chancellor was arguing about the importance of finding efficiencies.

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What do people want in the budget?

This is likely to boost Labour’s charge that the government is “maxing out the credit card” to keep its own supporters on side.

However, most Tories in government believe this is a necessary trade-off to allow the party to go into the next election presenting themselves as the low-tax party.

Some senior Tories disagree, however, worrying that the public is more worried about the state of public services than tax cuts.

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Budget 2024 explained

The budget is likely to have cuts or the abolition of non-dom status, which could raise £2-3bn, plus other small loopholes being closed, generating a few hundred million in revenue.

Read more:
Any tax cuts will need to be ‘undone’ after election – economist
Unfunded tax cuts ‘deeply unconservative’ – Hunt
When is the budget – timings and how to watch

The Politics At Jack And Sam’s Podcast also reveals how delaying Contaminated Blood compensation payouts has helped deliver tax cuts.

In January, the Treasury was worried those payments might reduce the amount the chancellor could spend before he reached the borrowing limits from his fiscal rules.

However, the inquiry will not report until later and the government is resisting calls for interim payouts.

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Any tax cuts will need to be ‘undone’ after election, economist claims




Any tax cuts will need to be 'undone' after election, economist claims

Any tax cuts made during this budget will “one way or another be undone after the election”, according to one economist.

Speaking to Sky News, Paul Johnson, the director of the Institute for Fiscal Studies, explained that – if it were not an election year – it is unlikely that Chancellor Jeremy Hunt would be looking to trim the tax burden.

Speaking to Sunday Morning with Trevor Phillips, Mr Hunt said his budget would be “prudent and responsible” – but added that he wanted to “make some progress” on the “journey” started by the two pence cut to National Insurance announced in the autumn statement six months ago.

The chancellor is facing pressure to cut taxes to try and shift the polls in favour of his own party, which is languishing well behind Labour.

Sunday Morning with Trevor Phillips
Sunday Morning with Trevor Phillips

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Mr Johnson said: “I think this is going to be a political decision in an election year. If this weren’t an election year, I don’t think we’d be talking about tax cuts at all.”

He added: “If we weren’t looking at an election, I think he would be saying, let’s steady as she goes, let’s see where we are in a year or two.

“But given it is an election, I suspect we will get some tax cuts.

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“My guess, though, is that those will, one way or another, be undone after the election.

“The state of public finances, the state of public services, the shortage of money for everything from the health service to local government to social care indicates to me, we’re going to need more money over the next five years rather than less.”

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Budget 2024 explained

Changes to income tax and National Insurance have been mooted as potential options, as well the government taking Labour’s policy of scrapping the non-dom tax status.

But with the budget itself not due until Wednesday lunchtime, Sky News understands decisions are still being made in Downing Street about what to include.

The tricky financial picture means there has been limited space to make pre-budget announcements.

Read more:
Unfunded tax cuts ‘deeply unconservative’ – Hunt
What to expect from the budget – tax cuts to vaping duty
When is the budget – timings and how to watch

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Budget will be ‘prudent and responsible’

The tax burden is reaching record levels, with it expected to rise to its highest point since the Second World War before the end of this decade as the country looks to pay back heavy borrowing used for support during COVID-19 and the energy spike in the aftermath of Russia’s invasion of Ukraine.

Mr Hunt has already announced plans for an £800m package of technology reforms which government hopes will free up public sector workers.

Mr Hunt claims that “we shouldn’t fall into the trap of thinking more spending buys us better public services” – and that the £800m investment will yield £1.8bn in benefits by 2029.

Torsten Bell, the head of the Resolution Foundation, worked in the Treasury as a civil servant before going to work for chancellor Alistair Darling in the financial crisis.

He explained to Sky News why Mr Hunt is having difficulty “rolling the pitch” – preparing the ground for the announcements in the budget.

Mr Bell said: “The reason why the chancellor is finding things quite difficult is two reasons; One is the difficult economic circumstance.

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What public finance figures mean for the budget

“We’re obviously coming out of a high inflation period, but we’re not seeing a lot of economic growth.

“And then on top of that, we’re in a world where they’re talking about tax cuts, but everybody around the country, everybody watching this knows that, the reality is this is an era of taxes going up.

“So it’s a difficult situation.”

Mr Hunt said he wants to cut taxes as it helps faster growth as seen in North America and Asia.

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“But it would be deeply unconservative to cut taxes in a way that increased borrowing that wasn’t fully funded,” the chancellor said.

“If I think of the great tax-cutting budgets of the past – Nigel Lawson’s budget in 1988.

“The reason that was so significant is because those tax cuts were permanent and people need to know that these are tax cuts you can really afford.

“So it will be responsible and everything I do will be affordable.”

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