Summer Budget 2015

Image: Number 10

On Wednesday, the Chancellor, George Osborne, unveiled a new budget which he described as “a budget for working people”. In reality, his measures will only exacerbate rising poverty and inequality. The measures which would be beneficial to working people, according to Osborne, included a “National Living Wage”. I am not opposed to a living wage, but Osborne’s “National Living Wage” is a living wage in name only. It will be £7.20 an hour in April 2016, and will rise to £9 by 2020. Most commentators would not define this as a living wage, which is much higher. In addition, the chancellor has frozen most working age benefits, such as tax credits. Paul Johnson, director of the Institute for Fiscal Studies (IFS), has revealed that those receiving tax credits would be “significantly worse off”, with 13 million families losing an average of £260 a year. Osborne’s budget is one of deception and trickery, pretending to aid low income families with a “living wage”, while in fact diminishing their already limited resources by cutting tax credits.

The changes announced not only put pressure on low income families and individuals; they also fail to achieve the aims laid out by this government. The Resolution Foundation has warned that tax credit changes will fail to incentivise work- something the government has consistently claimed to be achieving. From April 2016, anyone earning more than £3850 a year will have their working tax credits reduced more steeply. Previously, they could earn up to £6420. This is not only a failure in terms of incentivising work; it is an assault on the incomes of some of the poorest in our society. According to the calculations of the Resolution Foundation, by 2020, a low-income, single parent family with one child, working 20 hours a week, at £4.35 an hour could will be £1000 a year worse off. A low-income, dual- earner couple with two children could lose £850. In contrast, a middle-income, dual-earner couple with two children, each earning £15 an hour, will gain £350 due to increases in the personal tax allowance. This aspect of the budget fails to help those who need it most, instead pushing them further into poverty, while simultaneously increasing the incomes of those better off. In a society which has seen an astronomical rise in food bank usage in recent years, with a million now visiting them regularly, how is it justifiable to drag lower incomes down still further, whilst at the same time cutting Corporation Tax from 20% to 18%? We are witnessing a continuation of the shift in the balance of wealth from the poorest in society to the richest.

Some commentators will argue that the inequality which ensues is not important. For example, during his visit to University of York, Mark Littlewood, Director General of the Institute of Economic Affairs, stated that he has no issue with inequality provided people have enough to live on. The use of food banks establishes that many do not have the means to survive. However, inequality has even more adverse effects for society. In The Spirit Level, Richard Wilkinson and Kate Pickett reveal correlations between income inequality and a number of societal issues, including mental illness, poor health, and poor education. Of course, correlation does not imply causation, but it is not difficult to see how inequality exacerbates such factors. For example, students from low-income backgrounds, who are already at a greater disadvantage in the education system, are further impacted educationally by other factors, such as poor diet, which in turn leads to poor health and concentration. Sadly, this is a narrative which is being played out before our eyes, with teachers increasingly reporting students attending school having not eaten. Education and well being are important for our economy, and inequality has been found to have a negative impact on growth. The OECD has discovered that the UK lost almost 9 percentage points of growth due to rising inequality between 1990 and 2010. Taking all these issues into account, it is not hyperbole to say that Osborne’s policies are a recipe for disaster which will forge an unsustainable and unstable future.

A particularly unsustainable aspect of our economy, which will be fuelled by the budget, is the level of household debt in our economy. In 2014, the Office for Budget Responsibility (OBR) forecast that in 2019 total household debt would reach 184% of personal income. The impact that the budget will have on low incomes will increase levels of household debt, with more families forced to use payday loans as they struggle to live pay check to pay check. Considering that household debt stood at 169% immediately before the crash in 2008, it is clearly important to curb levels of personal debt to reduce the risk of further financial difficulty. Otherwise, the UK will replay the same mistakes, which many countries took part in, which contributed to the events of 2008: subprime mortgages, banks lacking adequate reserves, and lending money to those who do not possess adequate collateral.

The failure of the chancellor’s budget to adequately address the housing crisis will only worsen this problem. There are approximately 5 million people stuck on social housing waiting lists. The lack of social housing often forces into the more expensive private rental sector, which is a strain on government finances- with the housing benefit bill predicted to rise to £25 billion by 2017. The answer to this, however, is not simply to cap and cut benefits, because the result will be more people thrown into poverty and destitution. A better solution would be to build council housing. However, the budget encourages the very opposite; advocating the selling of council and housing association properties, on top of the coalition’s commitment to the right to buy scheme. Rather than creating the social housing so many desperately need, this government is diminishing the social housing stock. David Cameron pledged to replace the housing stock he sold off when he was in coalition. This did not materialise, so we should be sceptical when the same promise is made in relation to right to buy being extended to housing association properties. The chancellor is adding the replacement of student grants with loans into this equation. These are policies which will create a generation burdened with personal debts. Despite this, it is even questionable that the student finance policy will reap benefits for government finances, with the government themselves admitting that most of the debt will not be repaid. The policy is merely another form of statistical gymnastics by the chancellor, as the loans will not appear in the figures for the deficit; convenient for a chancellor who aims to achieve a budget surplus by the end of the parliament.

Despite the chancellor’s talk of “getting our own house in order”, we are following a path that is not sustainable. We need only look at the exponential growth in fees at American universities, where fees have surged 500% since 1985, to see that our current financial model for our higher education institutions is ludicrous. What happens when fees rise to such an extent that students decide to study elsewhere? The reduction in corporation tax too raises the same question: Where will this all end? In the 1980’s the tax was slashed from 80% to 40%, and subsequent governments, including New Labour, cut it still further. How long can this continue? Considering the fact that the chancellor had only recently cut the tax to 20%, the answer seems to be never. However, the electorate should ask themselves what happens when the race to the bottom with corporation tax ends? If corporation tax is abolished, how will countries compete? Will they cut wages? And what will the loss of a major source of tax income have on our public services? If other taxes are levied or increased, such as VAT, they may not make up the shortfall and will cripple lower-middle income and lower income families and individuals.

The chancellor often speaks of how it is not morally justifiable to pass on debt to the next generation. However, the chancellor’s concern for the next generation seems to have disappeared in this budget, with attacks on young people ranging from the scrapping of student grants, to the removal of housing benefit for 18-21 year olds, to the failure to provide parity in wages for under-25s. He does this under a guise of necessity, but let us ask ourselves: What kind of society do we want to build for our children? Do we want a society in which in which there are very high levels of personal debt and few state-provided public services, in which regressive taxation has replaced progressive taxation, and in which poverty has soared because the heart has been torn out from our welfare system? I propose a different strategy. It is not justifiable for us to leave behind a system for the next generation which does not possess a strong infrastructure to protect its citizens when they are in need, merely because of an ideological obsession with reducing the deficit and debt. Of course, we should try and do so, but not at the expense of people’s lives. Such an approach has not even been shown not to be successful under the last government, with the chancellor having added more debt in five years than Labour did in thirteen, despite draconian cuts.  The debt can be reduced in a more humane manner- creating growth in the economy, cutting housing benefit costs by building social housing and receiving rents and creating employment in the process. We should be trying to increase wages and we should build a welfare system which strenuously tries to provide for the poorest, so that children do not grow up in poverty.

Finally, we should challenge the Tories’ identification as the party of low taxation. The current budget contains £24.6 billion in tax cuts, but £47.2 billion in tax rises- a fact which compromises Osborne’s assertion that he is moving us to a “low tax” economy. Whilst the Conservatives may achieve lower taxes for some, many others are further burdened with taxes. Currently the poorest 10% in the UK pay 45% of their income in taxation, compared to the richest 10%, who pay 34.6%. This is caused by increased regressive taxation and cuts to top rates of tax- both of which have been carried out by the Conservatives. In the 1980’s, when Nigel Lawson gave huge tax cuts for corporations and in the top rate of tax, he also vastly increased the items on which VAT was placed and increased the rate of VAT. The poorest cannot afford such regressive taxation; it makes logical sense that those who have the means to do so should carry the burden. The poor, the disabled, the unemployed, migrant workers- none of them created this crisis- so why should they be the ones bearing the brunt of the cuts? Let’s build a society in which we alleviate the burden of personal debt, create a truly progressive system of taxation, and provide an infrastructure to support the current and next generation.

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