The Budget: Politically inspired, economically challenged?

14 Jul 2015

 

George Osborne’s Budget last week was less about economics and more about politics. From the very start of his address to the House, the Chancellor made it clear that his intention was to invade the centre ground: “This will be a Budget for working people … a big Budget for a country with big ambitions”. Seeking to secure the trust of ‘blue collar’ Conservative voters, a group skeptical of the Tory toff image, Osborne made obvious his belief that only a Conservative majority government can guarantee the ‘aspiration nation’ so readily discussed by Labour leadership hopefuls.

 

It was Labour who triumphed the policy of a National Minimum Wage, which the party introduced in the late 1990s. Now, however, it is the Tories who are promoting the principle of ‘making work pay’, by introducing a new National Living Wage which they hope to see reach £9 per hour by 2020. This will start next April at £7.20 an hour (an increase of 70p on the current Minimum Wage offered to those aged 21 and over), and will be compulsory for everyone over 25. A higher hourly wage sounds attractive to many, and has brought the Chancellor a string of favourable headlines. It’s a politically brilliant policy, but the reality is that - in economic terms - it will result in more jobs being offered to those who are adequately skilled or trained in a particular field for a higher salary, limiting positions available to individuals looking for a chance to work in any sector for a basic wage.

 

Keen to downplay the notion that the Conservatives are the ‘party for the rich’, Osborne announced that the personal income tax allowance will be raised from £10,600 to £11,000 next year, supporting many who currently work on a hourly rate or who are in part-time employment. According to Osborne’s calculations, 29 million people will pay less tax as a result, and a further six million will see their pay rise though the new National Living Wage. Again, great politics, but it is foolish to assume that poverty will be eradicated for many workers without continued taxpayer support – something the Chancellor seeks to minimise.

 

Benefit and welfare reform is perhaps the biggest area where the Chancellor is expecting some backlash. 18-21 year olds must now “earn or learn”, and will lose automatic entitlement to housing benefits unless they choose to enter work or education. Additionally, the cap on welfare benefits as a whole will be cut from £26,000 to £23,000 in London and £20,000 in the rest of the UK. In a controversial attack on single parents, the Chancellor announced that child benefits and universal credits will be limited to two children from April 2017. Although the Conservatives recognise that such policies will be unpopular, when coupled with the advances on working wages, the party believes that they have stolen a rhetorical march on Labour. Said at the despatch box it sounds convincing; but, in years to come, the economics of such offerings may prove otherwise.

 

Osborne’s Budget was advertised as equally historic as Lord Geoffrey Howe’s controversial one in 1981. Yet, aside from both men serving as Chancellors in Conservative majority governments, it is difficult to see any similarities between the two. In 1981, Howe revealed a list of considerable tax increases which went up to £4bn (in ’81 terms). Howe issued a “stealth tax”, along with further taxes on fuel and oil duty, a move deemed necessary in an era of high inflation and widespread unemployment. History demonstrated that his gamble was well-judged, and the Conservatives duly found themselves in government once again five years later. Osborne’s Budget, in contrast, was far less ambitious. In an attempt to ensure his political popularity, the Chancellor intentionally concentrated on economic incentives and brushed aside difficult questions regarding the effects of his welfare cuts.

 

 

Politically, and economically, Howe proved to be a Chancellor in control of Britain’s socio-economic climate. Howe even persuaded then Prime Minister, Margaret Thatcher, that tough measures were necessary in order to reverse the country's economic malaise. Politically, Osborne matches Howe’s accomplishment. However, time will tell if the economics of this Budget will truly prove credible. 

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