With one hand George Osborne giveth, and with the other he taketh away: today's budget was pitched as a move toward a society which is both "higher wage" and "lower welfare." On the former end of the equation was Osborne's biggest headline announcement, the introduction of a new, compulsory “national living wage,” to be set at £7.20 per hour when it comes in next April, rising to at least £9 by the end of the parliament. On the other side, Osborne announced a four-year freeze on working-age benefits, a reduction in the household benefits cap of between £3-6,000, and reforms to tax credits, including limiting child tax credit to only two children. As he announced the £12bn welfare cuts package, the force of bellowing from the Labour benches forced him to pause and sit down three times. When he delivered his living wage bombshell, he took revenge, repeating that section of his speech twice “because I don't think the other side heard.”
Other key measures included a commitment to spending 2 per cent of Britain's GDP on defence for the next five years, the removal of grants for poorer students, changes to emissions duty on cars to account for cleaner new models, and the abolishment of permanent non-domicile status, meaning that anyone living in the UK for 15 of the past 20 years will need to pay the same tax as a native Briton—a watered down version of Labour's last minute election pledge to abolish non dom status entirely.
But what are we to make of this clearly ideological budget, the first solely by a Conservative chancellor since 1996? We've gathered expert opinion below to help.
Child poverty will rise
Jonathan Portes, the director of the National Institute of Economic and Social ResearchIn the run-up to the election, Evan Davis on Newsnight asked the Prime Minister where £12bn of welfare cuts would come from. He replied "We have been getting people off what was called Incapacity Benefit and back into work. We’re going to continue with that, successfully reducing welfare". As I pointed out then, this was simply untrue.
This in turn meant—given the protection afforded to pensioners—that cuts in this Parliament would have to come from cuts to tax credits, housing benefits, family and child benefits, and disability benefits; this is exactly what has happened, albeit with the £12bn spread over the period to 2019-20 rather than by 2017-18. Two main measures account for the vast bulk of the savings: a cash freeze in most working-age benefits (representing a significant cut in real terms) and significant reductions in tax credits paid to low income families.
What will be the impact? Most research suggests that employers are unlikely to increase wages much in response, although there may be some impact. There will probably be some negative impacts on work incentives for the low paid, although this will be mixed. However, the impact on poverty (especially child poverty) will not: there is likely to be a substantial rise as a result of today's measures.
To what extent will this be counteracted by the announced increase in the national minimum wage (misleadingly rebranded as a "living wage premium")? The answer is not much: given the way that the tax credit system works, incremental increases in the minimum wage do very little to compensate for tax credit reductions, as Resolution Foundation analysis shows.
Read more on the budget:
Osborne has learned the lessons of power
Nice budget, George—shame about the sneer
A true blue triumph for Osborne?
Forgetting the deficit
Mark Wallace, Executive Editor, Conservative Home
Politically, it is a humdinger of a budget—fulfilling core Tory demands on inheritance tax and defence while filching Labour's entire wardrobe with the National Living Wage announcement. As a political Chancellor, this is Osborne's killing blow directed at the heart of an opposition already in disarray. Harriet Harman's pre-written response was left sounding irrelevant and poorly targeted.
Fiscally, though, the Budget is less satisfying. Faced with "new money" in the form of better projected tax receipts and higher income from privatisations, he had to choose whether to use it for deficit reduction or tax cuts. The Chancellor went for the latter, and in so doing has set back his timetable for returning the Exchequer to surplus by yet another year. Given that these timetables always seem to slip further, that could come back to bite him.
The living wage is a gamble
John Cridland, CBI Director-General
This is a double edged budget for business. Firms will welcome measures to balance the books and boost investment, but they will be concerned by legislating for wage increases they may not be able to deliver.
Firms have been unwavering in their support for the Chancellor’s deficit reduction plans and will welcome the clarity that the new fiscal rules provide. Other standout measures include making the Annual Investment Allowance permanent at £200,000, which the CBI called for, as well as much-needed investment in our roads network.
The further reduction in corporation tax is a welcome surprise but tax reductions for employers don’t appear to match the businesses most affected by a rise to £7.20 in the National Minimum Wage next April— a 7 per cent increase.
The CBI supports a higher skilled, higher wage economy, but legislating for a living wage does not reflect businesses’ ability to pay. This is taking a big gamble that the labour market can absorb year-on-year increases of an average of 6 per cent.
Firms want to play their part in training up more apprentices but an apprentice levy is a blunt tool. A volunteer army is always better than conscription but the CBI will work with the Government to make the best effect of this measure.
Women will suffer more
Serena Kutchinsky, Digital Editor, ProspectAmid all the macho braying and fist pumping that accompanied the delivery of today’s Budget, there was some seemingly positive news for women, although not quite enough to prompt a full scale smile from Theresa May. Considering the minimal space devoted to gender equality in the Tory manifesto I was surprised to hear the Chancellor boasting that the gender pay gap has fallen to a record low of 19.1 per cent, coupled with the good news that a record number of women are in employment. A cause for celebration you might think, but the figures require closer scrutiny.
Yes, the pay gap is falling, albeit slowly, and the number of women attending university now outstrips men, which is helping female graduates gain access to higher paid jobs, but as a spokesperson for the Fawcett Society said “this is a case of the easiest fruit being picked”. It does nothing to address the issue of the “motherhood pay gap”, which I have written about before on my Prospect blog. While UK women aged 30 working full-time now earn 81p an hour more than men on average, this trend quickly reverses, with a 39-year-old woman earning 12 per cent less than her male counterpart, and a 40-59-year-old woman experiencing a pay gap of 26 per cent.
The truth is that there is little in this budget to spark the type of structural change needed to help women gain economic independence. While the government’s offer of 30 hours a week free childcare for three and four-year-olds for working families is a baby step in the right direction there are concerns that lower income women will suffer. “Lots of the welfare cuts and tinkering with tax credits will hurt women in particular because women are particularly dependent on the welfare state…our praise of the government needs to be qualified in that regard, ” said the Fawcett Society.
All talk and no trains
Jonathan Derbyshire, Managing Editor, Prospect
The way George Osborne made the theme of devolving power to English cities and regions his own was one of the his biggest political achievements during the last parliament. That Labour allowed him to do so, was one of its most significant failures. This Budget confirmed the Chancellor’s determination to keep control of that agenda. “Devolution within England,” he declared, “has only just begun.”
Osborne announced further devolution to Manchester, the centre of the so-called Northern Powerhouse. The Greater Manchester Combined Authority will be handed more control over fire and children’s services and will run its own land commission. Osborne said the same kind of deal was on offer to other city-regions, in return for the introduction of elected mayors. (It’s worth pointing out that Manchester has done pretty well without an elected mayor thus far, but clearly the offer was one that the technocrats who run the city couldn’t refuse.)
The Chancellor also said that Transport for the North would be placed on a statutory footing and would receive £30m in funding. Scant consolation, you might think, for the halt to the upgrade of the Leeds-Manchester railway announced at the end of June by Patrick McLoughlin, the Transport Secretary. As the BBC’s political editor Nick Robinson, himself a son of the north, put it in a tweet today: “Chancellor promises to put power into Northern Powerhouse. North wants to know if the trains they were promised will ever run.”
Tough on students
Emran Mian, Director Social Market Foundation
The switch from offering grants to loans to help students pay for the cost of higher education was expected. But, additional changes mark a major shake-up of student finance. The first is that the total level of support for the cost of living is going up, by around £1,000 for students living away from home. But, the terms for repaying these loans are about to get tougher. The income threshold for repayment is currently £21,000. Graduates pay 9 per cent of their income above this level towards the loans. This threshold is due to go up every year but the Chancellor has announced today that the government will consult on freezing it for five years. If that occurs then more graduates will enter repayment earlier in their careers and will repay more than planned. This reduces the cost to the government of the loans.
A more technical measure reduces that further. Government currently calculates the cost of student loans on the basis of its own cost of borrowing the money that it lends. The Budget announces that the government will update that figure to reflect the current low cost of borrowing in sovereign debt markets. This creates room for the government to allow universities to charge higher fees without facing prohibitively high costs on the loans that students take out to pay those fees. However, universities will only win the freedom to charge higher fees—in line with inflation—if they can prove that they provide excellent teaching.
Overall, the cost of going to university is going to rise. The total amount owed by students living away from home will go up by around £13,000. The terms of repayment will get tougher and tuition fees may also rise.
Osborne's weedy bank tax
Jay Elwes, Deputy Editor, Prospect
The Chancellor executed some complicated economic gymnastics in the Commons today. Lost in the din of the Living Wage and reductions in welfare was the plan to wind down the Bank Levy, an impost raised on the banks as a permanent reminder to them that the government had not forgotten what they did back in 2008 and that they were not to do it again. But today the Chancellor announced that he was cutting the levy. It currently stands at the trifling-sounding 0.21 per cent, but it is charged against a bank’s entire global balance sheet, so constitutes a substantial cost. In the coming six years it will be cut to 0.1 per cent.
If the banks thought they were off the hook, they were mistaken. The Chancellor, while giving with one hand, has decided to take away with the other, sticking the banks with an all-new 8 per cent profits tax, which kicks in at the beginning of next year. The government estimates that, overall, this new regime will generate £2bn in extra tax revenue from the banks.
Having met a few bankers over the years, I suspect that they will not like this—and what’s more they will have identified some fairly generously-sized holes in the Chancellor’s new plans. The bank levy is raised against assets and assets are very hard to hide if you are a bank. They sit in a bank’s balance sheet and the rules governing their presentation and treatment are very strict. In contrast, the Chancellor’s new tax is on profits, and profits have nothing like the solidity of assets. Profits are very easily reduced, or rubbed out altogether by businesses with an incentive not to generate them. This is not done through super-charged financial innovation, but by buying things, or by paying employees more money.
The City will not be troubled by the Chancellor’s new tax plans—quite the opposite.
