The Chancellor's new policies might pass the Conservatives' "fairness test," but they are wrong headed, potentially driving more on to disability benefits and hitting small businessesby Jay Elwes / September 29, 2014 / Leave a comment
George Osborne’s speech to the Conservative Conference here today in Birmingham made clear that the £100bn of cuts he has enacted since 2010 are just the start.
“Eliminating the deficit requires a further £25bn of permanent public expenditure savings or new taxes,” said the Chancellor. This £25bn in savings would be found in the course of the next Parliament.
“And I tell you in all candour,” he continued, “that the option of taxing your way out of a deficit no longer exists.”
Working age benefits will be frozen for two years, which “saves the country over £3bn,” said the Chancellor. The benefit cap would be lowered to £23,000 a year. Benefit payments to 2m people will be affected.
There in a nutshell, is the Chancellor’s core economic thinking laid bare. Given the choice between cutting benefits or raising taxes, it’s benefit cuts, no question.
There are arguments in favour of this political reflex. It is crucial for Britain to make the most of its, in global terms, minuscule population. The more economic output that Britain can generate from its working age population, the better.
There is also a fairness test, which stirs Conservative hearts especially strongly, which holds that it is wrong that the benefits system can give more money to a welfare recipient than the average worker earns in a year. These arguments rang out in the hall this afternoon and were well received by the Chancellor’s crowd.
But Osborne’s policy is wrong-headed. First it assumes that unemployment is a lifestyle choice, a view that might be called the “Channel 5 sociological view of Britain.” It also assumes that, if prodded, welfare recipients could easily rouse themselves to find work.
This might be the case in a small number of circumstances, but research has shown that Britain already has some of the lowest unemployment benefit levels in the OECD. And what tends to happen when Jobseeker’s Allowance is cut is that it drives people onto disability benefit, a shift that occurred during the 1980 and 1990s and which research shows, is happening again now.
There is a further reason to view Osborne’s cuts with concern and that is what will happen to consumer spending. People at the lower end of the income scale tend not to save, meaning that what they get, they spend. Taking £3bn out of welfare payments means reducing by £3bn the amount that will be spent in shops and on high streets in areas of Britain that are already struggling. Cuts in welfare mean cuts in business receipts. So it is not only people in some of the most deprived areas of Britain who will feel the chancellor’s cuts. Small local businesses will also suffer.
After the speech Treasury officials stuck firmly to the line that these cuts were fair and that the benefits system was too generous.
The Treasury is also adamant that the public understands the need for further fiscal tightening, and that all one needed to do was look at YouGov’s figures showing that the Conservatives as more trusted on the economy than Labour. These figures, it was claimed, mean that the welfare cuts make political sense.
But a further glance at the opinion polls would show that, for voting intention at the next General Election, the Conservative party is currently six points behind Labour.
Osborne has taken a very big gamble today. He has set out a policy with “nasty party” written all over it, and which is unleashed now on the assumption that the public will see it as a necessary evil, will admire its toughness and, come May next year, will happily vote for more.
The Conservative party’s strong performance in polls on economic competence suggests that yes, people recognise the need for toughness. But the party’s stubbornly poor position in the voter intention polls suggests that there is only so much bitter medicine that the electorate will stomach.