The Blog

The Budget: Politically Influenced, Economically Challenged?


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 his intention was to hit Labour in the heart: "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 could pave the way forward in creating Labour's idea of an 'aspiration nation'.

Traditionally, 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. However, by scrapping taxpayer benefits for low paid workers, the Conservatives are sending a different signal on their economic message. 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 the positions available to individuals looking for a chance to work in any sector for a basic minimum wage.

Keen to downplay their label as the 'party for the rich', Osborne announced further cuts to inheritance tax, meaning that parents looking to leave family homes to their children up to the value of £1m will be relieved from paying what was a considerably high percentage back to the government. Another 'blue collar' incentive came in the pledge that income tax 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 his calculations, 29 million people will pay less tax as a result, and a further 6 million will see their pay rise though the new National Living Wage. Again, great politics, but it is foolish to assume that poverty will not continue for many workers without continued taxpayer support.

Benefit and welfare reform is perhaps the biggest area where the Chancellor is expecting some backlash. Somehow, £12b of savings to welfare has to be found. 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 believe that fewer families will feel the pinch and will instead see an improvement to their everyday lifestyle. Said at the dispatch box, politically, it sounds convincing; but in years to come the economics of such offerings may prove otherwise.

Osborne's Budget was briefed to be as historic a moment as Lord Geoffrey Howe's controversial one in 1981. Yet aside from both men serving as Chancellors in a Conservative majority government, it is difficult to see any similarities between the two. In 1981, Howe revealed a list of considerable tax increases which went up to £4b (in '81 terms), and issued an additional "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 paid off, and the Conservatives duly found themselves in government once again five years later. Osborne's budget, in contrast, was far less ambitious. In attempt to prove politically popular, he intentionally concentrated on the incentives of higher earnings and brushed aside the cuts the Tories will be implementing in welfare. Politically and economically, Howe proved to be a Chancellor in control of Britain's socio-eco climate during his time as Chancellor, even having to persuade the then Prime Minister, Margaret Thatcher, that tough measures were necessary in order to reverse the country's economic malaise. Politically, Osborne matches Howe's ambition. However, time will tell if the economics of this Budget will truly prove credible.

Before You Go