Five things we learnt: The Budget – July 2015

Wednesday 08th July

With every Budget comes fervent speculation about the ‘rabbit in the hat’ and this was no different. However, whilst we already knew plenty of what George Osborne was planning to say in his seventh Budget, the first Conservative Budget in 18 years did spring a few surprises which had been heavily pre-briefed as not happening. As the Chancellor ‘smoothed the rollercoaster’ of cuts to public spending (taking Britain back to the heady days of 1964, not the 1930s) and played the ‘greatest hits’ of increasing the personal allowance, slightly raising (slighter than backbenchers will have hoped) the 40% income tax threshold, and furthering the case for the independence of the People’s Republic Of Manchester with an establishment of the West Midlands ‘Engine for Growth’ to accompany the ‘Northern Powerhouse;’ here are five things that we learn from today’s Budget:

 

The ‘quiet man’ finally turns up the volume

The image of Iain Duncan Smith punching both fists in the air with delight, accompanied by a wall of deafening noise, at the news that Britain will have a Living Wage of £7.20 an hour next year – rising to £9 by 2020 – will surely adorn the front pages in the morning. Whilst the package promised by the Government perhaps doesn’t accurately reflect what the Living Wage will be by the end of the decade (it is already seen as £9.15 in London) and is probably more reasonably coloured as an increase to a minimum wage, it is undoubtedly a huge step in the right direction for Osborne to realise his vision of a ‘high pay, low tax, low welfare’ economy. It is a commitment from the Tories to ensure that hard work pays well, and to reaffirm business’ duty to reward its employees. This, in addition to the announcement of substantial reforms to the welfare system: a freeze on working-age benefits, a big reduction in the benefit cap, a ‘two child policy’ on tax credits and an affirmation that young people must ‘earn or learn’ – marked a Budget that was truly the culmination of the IDS project.

 

With great capital comes great responsibility

Osborne is a de-centraliser at heart and is a firm believer that it is the responsibility of business and not government to deliver prosperity – but government must create the conditions for businesses to pursue this agenda whilst accepting their responsibilities as wealth creators. The move to cut corporation tax to 19% by 2017 and 18% by 2020 was a clear quid-pro-quo from the Chancellor to ease the pain of forcing businesses to accept the need to pay their workers more. The raising of the Annual Investment Allowance to a permanent £200,000, while much lower than the £600,000 business leaders were calling for, is a strong boost to long-term planning for businesses, and the creation of an Apprenticeship levy, which will reward firms who are committed to training, is a clear incentive to create an up-skilled workforce that will benefit business both small and large. This, in addition to the ending of permanent non-dom status, was Osborne’s clearest sign yet that if wealth creators want the strong public services and high quality employment that will increase their businesses productivity they must accept their responsibility to help deliver those conditions.

 

You scratch my back…

The first budget after an election always brings with it presents for voters who helped put the Government in power, and today was no exception. The golden goose of right-wing voters that is defence spending was the piece de resistance of today’s announcement, with the Chancellor finally conceding to those who called for the UK to commit to defence spending at 2% of GDP. The pampering of the ageing middle-classes (who have benefitted substantially more than anyone from Osborne’s tenure) continued a-pace with the increase of the inheritance tax threshold on homes to £1m as well as continued locks on pensioner benefits. Even on the area that he could have gone hard on this particular group, the issue of buy-to-let mortgages, – an increasing bone of contention amongst the young – Osborne was notably lenient, graduating the changes over a very long period of time.

 

Kids these days

If the wealthy pensioners have been helped by this Government and the Coalition, it is very difficult to argue that this has not been at the expense of 18-24 year olds, and this Budget did very little to reverse that trend. Osborne was right to say that those who don’t go to university shouldn’t subsidise those who do and that tuition fees don’t put people off going into higher education, but scrapping the maintenance grant and instead pushing that money into an expanded loan will be potentially of serious detriment to university students from poorer backgrounds. The initiative is designed on the same lines as fees in that you pay more back as you earn – but it fundamentally misses the point that poorer students are unable to rely on their parents for additional funding at university and an additional debt burden after university doesn’t solve this problem. Equally, the fact that the Living Wage will only apply to those 25 and above means those poorer students can’t necessarily plug the gap by working whilst studying. It is also quite damning for the Chancellor that those most likely to not be paid the Living Wage currently, the unskilled or ‘in-training’ young or graduates who are doing internships, will not benefit from today’s flagship announcement. Further, for those who leave home at an early age – perhaps because of difficulties at home – an end to automatic housing benefit for 18-21 year olds could potentially have a significant impact.

 

Finishing the job

On a day full of economic promises, it is also worth reflecting on those that went unfulfilled during the last parliament. It must surely weigh on the Chancellor that, despite his best efforts, he was unable to eliminate the deficit and cut government borrowing during the last parliament. However, riding the wave of a parliamentary majority, and unencumbered by his former coalition partners, you can be sure that Osborne will want to make good on this front. This budget re-commits to these targets – a government in surplus and an end to borrowing – as Osborne seeks to create a fiscal legacy for governments to come by disrupting the long-held dictum that running a deficit is acceptable. He undermines Labour by arguing that ‘unsustainable’ deficits hit the poor hardest, and will create a rod for the opposition’s back by passing legislation which commits future governments to running a surplus in ambiguously-defined ‘normal times’. This is another example of this Government’s odd habit of legislating to fix specific fiscal items e.g. a 0.7% foreign aid budget, a practice which belies the Chancellor’s otherwise wily manipulation of the economic system and his much-touted successes in securing growth. However, to oppose this measure, Labour will have to effectively style themselves the party of deficit (despite widespread international acceptance of government debt as a defensible tool in economic policy). Very clever George.

 

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