The relationship between the prime minister and the chancellor of the exchequer is the most crucial one in British government, but it hasn't been studied very systematically, although I attempted a typology in my Economic Policy in Britain.
'Spreadsheet' Phil Hammond has suffered a blow to his reputation after he was forced to withdraw his increase in national insurance charges for the self-employed. The expressions of studied neutrality on those around him as he made his statement yesterday told their own story.
The line from Downing Street is that the Chancellor was warned beforehand about the political risks of the increase, but felt he had to go ahead to meet new spending demanded by the prime minister. Indeed, the Treasury line is that the prime minister and her aides are too keen to spend additional money, although something had to be done to provide additional funding for social care. Quite how the £2 billion hole in what was a fiscally balanced budget is going to be repaired remains to be seen. The Government has boxed itself in by its manifesto pledge not to increase income tax, VAT or national insurance, the main means of raising revenue.
In the longer run, something is going to have to be done about the erosion of the tax base by the growing numbers of self-employed, some a by-product of the digital economy, but many of them attracted by the tax benefits which include allowances not available to the employed. Employers also benefit from not having to pay NICs. However, it would have been surely better to wait for the results of the review being conducted by Matthew Taylor which will also look at the narrower range of benefits received by the self-employed. Certainly, Phil Hammond did not display much political awareness.
In the longer run, there is a need to look at the rationale of separating national insurance and income tax. National insurance is another form of income tax, but one not applied to particular groups such as the elderly. Whether any party would be prepared to tackle this particular hot potato is open to question.
What is the immediate political fallout from this U-turn? It shows that the Government is vulnerable to determined resistance by small groups of backbenchers, given its slim majority. School funding formulas will be the next target. It also showed once again that Jeremy Corbyn is unable to take advantage of government errors.
The SNP economy spokesman suggested that relations between No. 10 and No. 11 could revert to the days of Tony Blair and Gordon Brown. That will not happen because Phil Hammond has no ambitions to be prime minister. He is a Derek Heathcoat-Amory rather than a Gordon Brown. From Theresa May's point of view, it suits her to have a weakened chancellor beholden to her so his job is safe for now.
