July Budget 2015: George Osborne embraced political cunning at the expense of economic prudence

 
Mark Littlewood
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On Osborne’s watch, the UK economy has stepped back from the brink (Source: Getty)
On the one hand, this was the first fully Conservative Budget in nearly two decades. On the other hand, it is effectively George Osborne’s third Budget in just eight months. He has become a master magician at the politics of presentation. Almost every sentence was crafted to confound and confuse the Labour opposition or to provide usable soundbites to his own Tory allies.

But cunning political manoeuvring rarely sits comfortably with sound economic thinking. And so it proved again yesterday. There were some very welcome announcements, but also a string of complex, fiddly changes to the tax system, mixed in with some highly counter-productive grandstanding.

Like any good conjurer, the chancellor finished with his best and most surprising trick – an act of stunning political cross-dressing. Embracing a plank of the defeated Labour Party’s recent manifesto, the Tories are going to increase the standard minimum wage to £9 an hour by the end of this Parliament. When the Green Party welcomes a section of a Conservative Budget, you can certainly conclude that Osborne was acting counter-intuitively.

But in this instance, he was acting foolishly too. By most estimates, we are now heading to a situation in 2020 in which about a fifth of all workers in the private sector will have their wages set by a government quango. A vast swathe of the workforce will not be remunerated on the basis of the productive work they carry out for their employers. Instead, they will effectively be paid according to a judgement about the prevailing cost of living – which is crushingly high in Britain, largely due to state interventions and regulations. Relatively low skilled workers are going to find it harder to find gainful employment thanks to this policy.

We also heard the details of the chancellor’s £12bn crackdown on welfare spending. Bewilderingly, total welfare spending in Britain now amounts to about £10,000 per household per year. Osborne is right to get this under some semblance of control and continue his long march to ensuring the state lives within the means of taxpayers. But by refusing to remove any benefits from pensioners – even from very wealthy pensioners – the burden fell heavily on in-work benefits.

In trying to unravel the obscenely complex tax credit system, the chancellor has a daunting task. If you don’t withdraw tax credits as household earnings rise, you end up extending the reaches of welfarism to an absurdly high number of households. But if you withdraw support too quickly, you disincentivise work. We still have a major problem in the effective tax rates faced by those towards the lower end of the income spectrum. The changes announced by the chancellor yesterday may mean that some workers will now lose as much as 80 per cent of their salary as they enter the workforce and climb up the career ladder.

For those on middling – or better – incomes, there was the modest comfort that the government has pledged to ensure that the 40p tax rate will, eventually, only kick in on earnings above £50,000. The number of people dragged into this high rate of tax has trebled in the last 25 years. But yesterday, the threshold was only nudged upwards by a paltry £600 or so – less than average wage growth. And, of course, the highest rate of income tax – at 45p – remains unchanged.

In painting an overall picture of the British economy, the chancellor had some fairly good news to share. The UK is predicted to grow at around 2.5 per cent a year for the foreseeable future. That’s hardly a heroic figure, but it does compare very favourably to other developed countries. The deficit is, slowly but surely, coming down. Osborne’s proposals for a Fiscal Charter may go some way to deterring reckless spending by future governments by enshrining a protocol of prudence into law.

Things could be a lot worse. One only needs to look to the catastrophe of Greece to see the disasters that can unfold if public spending spirals out of all control. On Osborne’s watch, the UK economy has stepped back from the brink. But this was the first Budget of the new Parliament, a time when the chancellor can surely afford to be long-term, strategic and even politically unpopular. It’s telling that the market reaction that was most pronounced as the chancellor sat down yesterday was the bookmakers slashing the odds on Osborne being our next Prime Minister.

This Budget was politically masterful – but in many areas it was economically suspect.

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