Today George Osborne delivered the first fully Conservative budget since 1996. With the Liberal Democrats and coalition government a distant memory following May’s decisive general election results, Osborne’s budget was a crafty, ambitious, and skillful political statement, in which he slowed the pace of austerity, and showed a distinct taste for Labour Party blood.
The budget’s headline announcement was saved until last, as Osborne unveiled plans for a national living wage. This will overtake the minimum wage, being compulsory for workers aged over 25 years old; starting next April at £7.20, and rising by 2020 to £9. The Low Pay Commission will recommend future rises.
Citing the Office for Budget Responsibility, Osborne predicted that the introduction of this living wage will have only a fractional effect on jobs, resulting in 60,000 job losses. He argued that overall, by 2020 a strong economy will have created an additional one million jobs, more than making up the difference. Altogether, he asserted that the living wage, complemented by the other measures contained within his budget, will see 2.5 million receive a direct pay rise; a pay rise of a third over the course of parliament for those currently on the minimum wage, amounting to an extra £5,000 for a full-time worker; and a pay increase for 6 million people in total.
This sounds fantastic – and a living wage has been a long and increasingly enunciated goal of the left. Campaigning ahead of the general election, Labour promised to raise the minimum wage to £8 an hour by 2020, and to push for the widespread adoption of a living wage. By supplanting the minimum wage with his living wage, scheduled to reach £9 by 2020, Osborne appears to have bettered Labour’s pledge.
Yet the independent Living Wage Foundation presently recommends a living wage of £9.15 for Londoners, and £7.85 for elsewhere in the UK. £7.20 from next April represents a significant increase on the minimum wage – which stood at £6.50 for 2014 for those over 21, and is set to rise this year to £6.70 – but it falls some way short of these independent recommendations. It has been suggested that the minimum wage would likely rise to about £9 by 2020 without any intervention, given the forecasted growth of GDP. More, Labour’s idea of an £8 minimum wage and an optional living wage did not conceive the decimation of tax credits, which currently supplement the wages of lower-paid workers.
Arguing that we spend ‘more on family benefits in Britain than Germany, France, or Sweden’, Osborne announced a four-year freeze on working-age benefits – including tax credits and local housing allowances, though excluding maternity pay and disability benefits. The income threshold for tax credits will be reduced from £6,420 to £3,850. And support for children through tax credits and universal credit will be limited to a family’s first two children.
Once cuts to tax credits and reductions to other benefits are taken into account, many of the lowest-paid members of society will be substantially worse off under this budget – even with the new living wage. Factoring in such cuts, an authentic living wage in London today would stand as high as £11.65. Different sources have noted how an adequate living wage would organically lift workers from the system of tax credits, thereby reducing the benefits bill without the need for explicit cuts; and that the tax credits system as it has functioned has largely subsidised low-paying employers. Finally, Osborne’s living wage will do nothing for all of those low-paid workers under the age of 25.
To help offset the effect on businesses of the living wage, Osborne announced a corporation tax cut, first to 19%, then to 18% by 2020. There will also be National Insurance relief for small firms, with the ‘Employment Allowance’ increased to £3,000. There were few measures towards significantly curbing tax avoidance – something Labour’s Harriet Harman immediately picked up on in her budget response – although the oft-criticised non-domicile tax status will be reformed.
Public sector pay rises will be capped to 1% per year for the next four years. The budget will see the benefits cap reduced from £26,000, to £23,000 in London and to £20,000 elsewhere. Legislation will lock the main rates of income tax, National Insurance, and VAT over the next five years. The personal allowance will be increased slightly, from £10,600 to £11,000. And there will also be a minor rise on the 40p tax threshold, to £43,000 (with £50,000 a long-term aim).
When it comes to rents and housing, rents paid in the social housing sector – which have risen by 20% since 2010 – will be reduced by 1% a year for the next four years. Osborne stated, ‘Taken all together, the freeze in working-age benefits, the downrating of social rents, and the focus of tax credits and universal credits on the lowest-income households will reduce the welfare bill by £9 billion a year by 2019/20.’
Housing benefit will be scrapped for under-21s. The budget will also require those on higher salaries in social housing – those earning £40,000 or more in London, and £30,000 or more elsewhere – to pay rents at the market rate. Restrictions will be imposed on the current practise of tax breaks for buy-to-let landlords. On the other hand, as previously announced, the inheritance tax threshold will increase for married couples from £650,000 to £1 million by 2017. Osborne assured that this will be paid for by a tapering away of pensions tax relief.
One of the most controversial announcements of the day saw maintenance grants for students – currently paid to students with family incomes below £42,000 – scrapped, and converted to loans. There will be a new ‘apprenticeships levy’ on all large firms. And there was talk on building the ‘Northern Powerhouse’, while offering greater devolution to those cities willing to accept elected mayors.
Fuel duty has been frozen for the remainder of the year. Osborne committed to the NATO target of spending 2% of the national income on defence. And the changes to the funding of the BBC, announced earlier this week, were reiterated: with the corporation agreeing to accept the £650 million cost of free television licences for those over 75.
In the immediate aftermath of the budget statement, BBC political editor Nick Robinson outlined the dilemma facing Labour. He suggested that the party could either broadly accept the direction of many of Osborne’s plans, and effectively fiddle on the margins of the announced policies; or else launch a more vehement attack on Conservative ideology, but only by thoroughly vacating the political centre. The NHS will continue to be a point of differentiation. But otherwise, Labour may be left defending ever-more narrowly those on welfare, who they have allowed to be demonised for much of the past five years: surrendering their core values, and unwilling to uphold or rethink the systems their predecessors put in place.