16 July 2015
The people who cannot afford it
by John Watson
There are two distinct sides to Mr Osborne’s budget. From a macroeconomic point of view, he has been less austere than expected, moving the date on which the budget is expected to balance to 2019/2020 and relying on growth to push down the crucial ratio of debt to GDP. Perhaps that is wise and he is probably right, too, in his judgement that setting a minimum wage at £9.20 per hour from 2020 will not wreck the employment figures. Politically, the move from tax credits to higher wages sends a message. This is a Chancellor whose agenda is to move Britain away from a culture of dependency and to create a high productivity, high wage society. The same emphasis can be found in his work outside the budget where the Treasury command paper “Fixing the foundations: Creating a more prosperous nation” issued by the Chancellor and the Business Secretary on Friday sets out the modernising measures on which prosperity depends; these include an early decision on the new airport for the South East, the introduction of fracking, modernisation of the transport system and proposals for the liberalising of planning which, despite the Government’s commitment to localism, will greatly reduce the ability of nimby town halls to resist development.
It is too early to say whether Mr Osborne’s crusade will be successful. After all, we have been promised things before. “Cool Britannia” wasn’t it? I am not sure what that meant so it is hard to tell whether or not it was achieved. Then what about Harold Wilson and his promise of a nation “forged in the white heat of technology”? It certainly sounded good but, like words on the menu of a bad restaurant, it didn’t really describe what arrived. Let us hope that Mr Osborne’s agenda fares better but, whether it does or does not, it will have an immediate political effect. Governments with reforming zeal do not sustain nearly as much damage from the rough and tumble of day-to-day political life as do governments which are simply trying to manage events. That is a matter of physics –part of the theory of momentum. Regardless of whether Mr Osborne’s vision is ultimately realised, he has bought the government a coat of political teflon for the time being.
This advantage, however, is bought at a price and, like all the best prices, it is one which is paid by someone else. That takes us to the second side of the budget and those who are on the wrong end of some of the changes. There are a number of views as to whether the loss of tax credits will be compensated by higher wages. In some cases no doubt they will be but certainly there will be many cases where they will not. Here real people are going to have the finances on which they base their lives wrecked at a stroke of the Chancellor’s pen and it is not just low paid workers who will find that the goalposts have been moved, either. What about those who have bought “buy to let” property on the basis that they would get full relief on interest paid, and now discover that the relief is only at the basic rate? What about those who find that their educational grants are to be replaced by loans? What about businesses which have budgeted on the basis of exemptions from climate change levy which are now being abolished? What about families whose benefits are now capped? What about rich foreigners who have built their lives here on the basis that their overseas income will not come within the UK tax and yet are going to lose that exemption because they have resided here for fifteen years? Perhaps you feel that they have had it too good in the past, but whether they have or they haven’t, they are still people who organised their lives in reliance on a regime which has now changed and they will now need to reorganise them.
The point here isn’t that any of the changes are wrong in themselves. Maybe they are: maybe they are not. However that be, they inevitably disrupt the assumptions on which people have planned their lives and that is a bad thing in a society which encourages thrift and financial self-reliance. After all, if you want people to put their energies into storing up treasures on earth, it makes sense to minimise the moth and rust. Unexpected changes which undermine financial planning can only lessen the incentive to save.
If you follow this logic through, it must follow that it is often worse to increase net income by giving credits or concessions and then to withdraw them a few years later, than not to give them at all. It is true that the recipient benefits from extra cash for those years in which the beneficial regime is in place, but the natural reaction to that is to take on commitments which, once the benefits have gone, it is quite impossible to meet. That is not a good place for people to be left.
The reform of the tax system is a difficult business and inevitably damages people who cannot afford to be hurt. We all know that, as do the politicians, but the alternative of never reforming the system is not a practical one. Still, there are lessons which can usefully be learned, and it would be nice to think that the Tories will ask themselves two questions when they survey the range of possible pre-election give-aways in their last budget before the next election with (let us hope) the country in better economic shape than it is in now. First, are the give-aways sustainable if things turn down? Second, if not, what effect will the reversing of the benefits have on the individuals or businesses who have come to rely on them?
