Norman Lamont and Editorial Comment:

Mr Hammond poked fun at my 1993 statement, but now he knows how it feels when the flak flies

At the start of his Budget speech, Philip Hammond, the Chancellor, reminded everyone that I, like him, had announced in March 1993 a “last spring Budget” before moving it to the autumn. I remember that 1993 Budget very clearly, for it was both my last and my most unpopular. As Mr Hammond joked, John Major called it “the right Budget, at the right time from the right Chancellor” – 10 weeks before he tried to persuade me to switch to the Department of the Environment. I decided to resign instead.

Looking at his post-Budget reaction, the current Chancellor could well be forgiven for thinking that it’s déjà vu all over again. Certainly the poor reception has reminded me of the headlines I got after the 1993 Budget though, unlike Mr Hammond, I knew they were coming.

Eleven months earlier, we had won an election virtually everyone thought we were going to lose. The Conservative Party’s reputation as the party of low tax was central to winning it. John Smith, Labour’s shadow chancellor, foolishly promised large tax rises by abolishing the ceiling on employee National Insurance Contributions, a vivid and telling reminder of the political risks of playing around with National Insurance.

Voters do not see any distinction between National Insurance and taxation. Labour’s 1992 National Insurance proposals set the dividing line between Labour and Conservative in the ensuing general election. We ran posters across the country of Labour’s tax double whammy, a boxer’s one-two combo of more taxes and higher prices.

What is said in a general election matters. Whatever politicians like to think, voters don’t focus on the small print. What really counts when voters are making up their minds is the overall drift they pick up. It’s therefore unwise for politicians to act as if the small print offers an escape route. Yet after we won the election I was conscious that our ability to cut taxes couldn’t go faster than our ability to reduce the share of public spending in the economy. At the same time, I knew we first had to get borrowing under better control.

Unfortunately, by late 1992 the recession had forced tax revenues down, worsened by an unexpectedly rapid fall in inflation. We were facing the prospect of a dangerously high deficit, equivalent to 7 per cent of GDP.

There was a clear national imperative: in the first Budget after the election, I had no choice but to take decisive action to bring borrowing under control in a manner that would convince the markets of our resolve. All this added up to a combination of public spending restraint (which colleagues were reluctant to accept) and, in addition, the largest rise in taxes since Geoffrey Howe’s 1981 Budget, phased in over three years.

I was under no illusion that all this would be anything other than deeply unpopular. Although I avoided raising the basic rate of income tax, National Insurance did go up both for employees and the self-employed. I was fully expecting that we would be accused of breaking election promises. None the less, the Budget, while politically costly, was right economically and ushered in the long period of growth that followed. Unfortunately the main political beneficiaries were Tony Blair and Gordon Brown.

So to the lessons for this year’s budget:

Election pledges should not be lightly given – to have committed oneself to not raising VAT, income tax and National Insurance all at the same time was unwise in the extreme – and tax pledges cannot be lightly cast aside. My guess is that, in time, the Chancellor’s tax raid on the selfemployed will be seen as a rookie error. He is fortunate in having plenty of time to regain trust on tax before the next election. Above all, the Chancellor should not increase taxes again to finance extra discretionary public spending.

The growth of self employment in recent years has been seen, rightly, as part of the dynamism and entrepreneurship that has distinguished the British economy from some of our continental neighbours. This group includes many of the Just About Managing types the PM has specifically said she wants look after. Hence the unpopularity of what has been proposed forcing the PM to say she will listen to concerns.

In any package that does emerge, I do hope the Government will resist the temptation to offer the self-employed a sop with welfare benefits such as increased maternity and sickness pay. That would not be “fairness” but mere bureaucratic tidiness. The selfemployed should have lower NICs, not equal benefits. Doing otherwise goes against the entire grain of Conservative policy since 1979. The party needs to recover the dynamism of the Fowler reforms that led the portable pension revolution by deploying tax incentives to encourage people off tax-funded benefits into funded private pensions.

Welfare spending is still on an unsustainable trajectory. As a country, we need to shift from tax-funded welfare to rewarding people for saving and insuring themselves. We need imaginative tax reform; that includes property taxation. Our fiscal position – as the Chancellor acknowledges – is still far from secure.

But unless the Chancellor taps into supply-side reforms and the Thatcher radicalism that marks the most enduring economic achievement of modern Conservatism, this Budget won’t be the last in which he finds himself announcing increases in taxation.