Politics v Economics
Adam Boulton writing in The Sunday Times did a good job of separating the politics from the economics in what was the first 'all-Conservative' budget in recent years.
I've always had a dislike of budgets ever since Gordon Brown, in one of his early outings as the 'Iron Chancellor', exaggerated government figures to a ridiculous degree by introducing a new Treasury wheeze in which he essentially 'treble-counted' Labour's future plans on public spending.
So who knows where this will all end up, but for the moment the initiative seems to rest with the Conservatives.
Behind Osborne’s lip-smack of triumph, the budget time bombs tick
There are two old sayings that wiseacres like to pass on about budgets. The first is that budgets unravel; the louder that government MPs cheer on budget day, the more timebombs will turn out to have been planted under their seats.
The other axiom is that if a chancellor has something nasty to do, he (we’ve only had men so far) is best advised to do it in the first flush of election victory, when the next verdict from the voters is a long way off.
Osborne’s second, “summer” budget of 2015 flirts with these clichés. As the applause dies away, analysis confirms that the nation will be paying more to government and getting less back.
Yet this weekend the budget looks like a game changer, boosting both Osborne and the government’s political fortunes. He has become the bookies’ heir apparent to David Cameron.
Labour was in as much disarray as the London commuters milling around strike-hit Tube stations. Perhaps this was because Osborne had plundered Labour’s recent manifesto for some of his headlines — notably in raising the minimum wage not to £8 an hour as Ed Miliband had promised, but to £9.35, albeit by 2020.
It was a triumph of presentation to generate a sense of giveaway with the promises of “a higher wage, lower tax, lower welfare” society when his own figures showed the budget to be a big takeaway.
Over the lifetime of this parliament Osborne plans to raise £47.2bn from the taxes he announced last Wednesday, at the same time cutting welfare by £35bn. There is a further £20bn to be slashed from non-protected departmental spending in the autumn statement.
The government did all it could to hide the fact, but we are nearly all losers from this budget. The Treasury and Office for Budget Responsibility did not publish the usual chart showing the impact of the tax and benefit reforms on different income groups. We had to wait for the independent Institute for Fiscal Studies (IFS) to work out that only the second-highest decile of earners end up in pocket. That means a couple with two children need a hefty after-tax income of between £59,611 and £76,267 to be quids in.
Those hit hardest are at the lower end of the spectrum, summed up in the IFS conclusion that 13m families will be worse off by an average of £260 a year thanks to Osborne’s freeze on working-age benefits. Families of the working poor will face real hardship as they wait to see if the “high-wage society” materialises.
Cleverly, given the present public mood of resentment, Osborne also targeted the top end. The very rich will be hit by taxes on dividends and insurance premiums and by the clampdown on non-doms. The financial sector takes a further slap — with a tax on bank profits, which for them will obliterate any savings from reduced corporation tax.
More predictably, economists are unhappy with the chancellor’s ideas. They can find no intellectual justification for raising the inheritance tax threshold for property alone to £1m. They fear that the substantial rise in minimum wages will trigger job losses.
Looking further under the bonnet, big increases in both public and private debt are expected. Total household liabilities are set to rise to £2.4 trillion or 167% of household income by 2020. This only emphasises how much of Britain’s record growth is being engineered by stimulating the private housing sector. This was reiterated when the national productivity plan unveiled by Sajid Javid and the former Goldman Sachs banker Lord O’Neill largely consisted of regulatory changes to encourage more house building.
The prominence allowed to Javid for this announcement is typical of the captain’s innings Osborne played with his budget. By sharing the credit around, he hopes to create allies rather than rivals for his rise to the top.
Other leadership challengers received a similar smothering embrace from Osborne. Boris Johnson was slapped down with jokes about the days when planes flew freely over London, but he still got £1m for the “dilapidated campaign bunker” in his new constituency left over from the Battle of Britain, the 75th anniversary of which we are now celebrating.
The ring-fenced departments beholden to the Treasury were expanded to include defence. Jeremy Hunt, the dark horse in the leadership stakes, had his slogan “the NHS is only truly safe in Conservative hands” pinched by his superior. No wonder last year’s favourite, the home secretary Theresa May, still squeezed on police and border-force spending, was reduced to the role of cupbearer, topping up the chancellor’s glass of water while he spoke. The long-time Osborne punchbag, Iain Duncan Smith, was transformed into his most enthusiastic cheerleader.
More manager than player, Cameron plans second-wave “interventions” over the next three days on the implications of guaranteed defence spending, on the national living wage and at the summer’s final session of prime minister’s questions. But he has been content to see other ministers put runs on the board while the field is empty of opposition.
No 10 says “the bilateral” of Cameron and Osborne has been developing the living wage idea since 2013, but was unable until now to get the welfare cuts from the Liberal Democrats to pay for it. The return to Westminster of Steve Hilton, a champion of better pay, was a harbinger that the old firm is back in business.
Unravelled, this budget means five more years in the grip of austerity for a modest ideological gain. The share of national wealth consumed by the state in 2020 will be no smaller than it was in some of the Blair-Brown years.
The Conservatives got more votes than anyone else in the recent election and Osborne’s budget tuned to their wavelength again. Opinion polls since the budget show that while voters dislike specific measures and do not expect to get wealthier, they overwhelmingly endorse cutting and capping welfare and “making work pay” through higher wages.
The media-shy Osborne courts popularity through his actions rather than his personality. The awkward 8-minute delay before his voice materialised in what was supposed to the prime 8.10am interview spot on Radio 4’s Today programme on Thursday may have an innocent explanation. It certainly put the BBC in its place. As does his witty ploy of making the corporation a dispenser or cutter of welfare itself through responsibility for the over-75s’ licence fees.
The politics is good. The economics is more questionable. Osborne’s political hopes will depend on continued economic success to disarm his budget timebombs.
