Sunday, March 19, 2017
After the U-turn - thank the self-employed for Britain's jobs' miracle
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

It might be an age thing but the pace of life these days can be dizzying. There was a time when budgets rarely unravelled, and even bad and unpopular measures were seen through to the bitter end. Then, more recently, they started unravelling, but not usually for a few weeks.

Now Philip Hammond has set something of a record, though not of his own making, by dropping his main budget tax-raising measure, the 2 percentage point increase in Class 4 national insurance contributions (Nics) within a week.
Though I argued last week against this tax hike on the self-employed, I am not going to crow about the U-turn. The chancellor has enough enemies. He and the Treasury will take comfort from the argument that they were trying to do the right thing by the public finances and the tax system; correcting important unfairness in the latter. They will argue that politics got in the way of good economics.

I am not sure about that. The Nics’ increase is dead, for this parliament at least, so is water under the bridge. But the review that Theresa May commissioned from Matthew Taylor, chief executive of the Royal Society of Arts, will still be published in the autumn and could recommend enhanced rights for the self-employed. Taylor backed the increase in Nics though said it should not go any further.

The rise in self-employment has been a key contributor to the employment “miracle” in Britain in recent years. Without it, we would have seen a decent post-crisis jobs’ recovery. With the growing army of the self-employed, we have seen a record employment rates, and an unemployment rate, 4.7%, which equals the lowest since the mid-1970s.

The question is whether, once you start to tamper with the self-employment model we have in Britain, which is less-regulated, lower-taxed and on average lower-waged than employment, you kill it off. Has the self-employment boom, in other words, only been possible because of the existing model?

Looking at the numbers, there are 4.8m self-employed people in Britain, 3.44m of them full-time self-employed and 1.37m part-timers. The increase in the number of self-employed people in the past eight years, 1m, compares with a rise of 500,000 in the eight years leading up to the crisis. Without it, the employment rate would be closer to 72% than the current 74.6% record, and unemployment near to 2.5m, or nearly 7.5% of the workforce, instead of 1.6m and 4.7%.

Nor is there evidence of any slackening in self-employment growth. In the latest three months there was a rise of 49,000 in self-employment, almost three times the 17,000 increase in the number of employees. In the past 12 months the figures were 148,000 and 144,000 respectively.

What has been driving the boom in self-employment? A number of factors. Some of it has been straightforward preference. People like self-employment because it offers greater freedom and variety, and not just in the gig economy. For some businesses, it is easier and cheaper to employ contractors than take on full-time staff.

Advances in information technology, meanwhile, have made it easier and cheaper for people to work from a distance and freelance, although that does not explain why the rise of self-employment has been greater in Britain than in most other countries.

Labour market conditions matter. In the aftermath of the crisis, when there was initially a fall and then barely a recovery in the number of employees, many people saw self-employment as an alternative to unemployment. By becoming self-employed they kept their hand in and, while this may have been involuntary self-employment initially, most of those who became self-employed in this way did not return to traditional employment when the opportunities arose to do so.

No story of self-employment is complete without a reference to pensions. A good company pension was once a powerful argument for being and remaining an employee. The decline in company pensions has, however, reduced the attractions of being an employee. At the top end of the scale, where the highly paid have run up against the government’s lifetime allowance, now just £1m, the argument for staying in a company scheme, and therefore in a company, has diminished.

The years of declining pensions, thanks both to government action and ultra-low long-term interest rates have had another self-employment effect. The glory days of retirement in your 50s with a generous pension have long gone for most people. These days, many more need to top up their inadequate pensions with a self-employment income.

How much has the rise in self-employment been driven by its tax advantages? A couple of years ago the Office for Budget Responsibility identified that some of the rise in self-employment may have been driven by access to tax credits. Around a fifth of the self-employed are in receipt of such credits. At the margin this, and lower Nics, will have driven some of the rise in self-employment. I doubt, however, that it explains much of the rise.

The rise of self-employment has been an undoubted boon for the economy, contributing to much better labour market numbers and, overall, helping the public finances, when compared with the alternative of these people not working and not contributing to tax revenues, and drawing more from the state.

The Resolution Foundation, the think tank which emerged as the strongest backer of the move, surprised me more than a little. One of the debates I have had with it in recent years has been over the earnings of the self-employed. Only six months ago it reported that the typical real earnings of the self-employed are lower than they were 20 years ago, and on a like-for-like basis they have fallen significantly since the crisis. This is an odd context to hit somebody with a tax hike.

What about the question, raised by former Treasury officials and others, that if raising taxes is so difficult, we cannot be serious about deficit reduction, and so everybody should have supported the rise in self-employed Nics?

The flaw in this argument is that it is a bit late in the day. The one big tax rise during the government’s deficit reduction programme, the 2001 increase in Vat to 20%, has mostly been given back in the form of increases in the income tax personal allowance, the long freeze in excise duties on petrol, and so on. If there is a need for higher taxes to reduce the budget deficit, they should apply to all taxpayers, not smaller groups. I doubt after last week we will be seeing that from the chancellor, however.

From the government, meanwhile, it will be important to nurture self-employment, not stifle it. That should be the good news from this U-turn.