LONDON (Reuters Breakingviews) - Philip Hammond’s budget U-turn is a profoundly destabilising event. The UK finance minister blew up his reputation for understated competence by scrapping a modest hike to tax paid by self-employed workers, announced just a week earlier. It’s a bad backdrop as Prime Minister Theresa May heads into years of complex negotiations to quit the European Union.
Gradually raising so-called national insurance rates for the self-employed to 11 percent from 9 percent shouldn’t have been a big deal: employed workers already pay 12 percent, and centrist think-tanks like the Institute for Fiscal Studies backed harmonisation. Yet the modest reform proved controversial because Hammond’s Conservatives are theoretically the party of entrepreneurs, and because May’s predecessor, David Cameron, had foolishly pledged not to hike taxes in the party's 2015 election manifesto.
With a narrow parliamentary majority, May cannot afford to ignore dissent. Still, with the opposition Labour Party struggling, the government could have toughed it out. Hammond had sensibly ditched another key pledge of his predecessor George Osborne – to run a budget surplus by the end of the current 2015-2020 parliament.
Reversing the tax hike entails a modest hit to the UK public finances of 2 billion pounds over the next five years, according to the Office for Budget Responsibility. The much greater damage is to the government’s credibility. Since May and Hammond assumed their roles last summer, the assumption has been that Brexit would at least be negotiated by a government that is firm and competent. This is now in doubt.
Imagine that EU negotiators open the forthcoming negotiations with a demand that Britain pays a hefty exit bill in the tens of billions of pounds. If the government can’t even face down a backbench revolt on a justifiable tax tweak, it’s unlikely to be in a position to argue for paying up to secure a better deal. The upshot is that a disorderly Brexit on unhappy terms for the United Kingdom has become more likely.