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Five tricks that George Osborne may pull in his Budget tomorrow

7 July 2015

11:30 AM

7 July 2015

11:30 AM

It’s Budget day tomorrow, and as James Forsyth put it recently, George Osborne will never have a better time to do bad things. The Labour party is a complete mess, the quality of scrutiny will be pretty ropey. So if he’s going to pull a fast one, now’s the time. Gordon Brown’s budgets were famous for having a lollipop (a goodie, briefed out to the press) and several weasels (nasties, heavily disguised in the small print). Now, Osborne may well be honest about his good and bad news tomorrow. But his Treasury staff, schooled by years of Brown’s shenanigans, may have persuaded him that the best way to deliver bad news is to conceal it. I like to think that the Chancellor will be honest, and deliver a Budget speech that is a fair reflection of the good and bad news in his Budget. But you never know. So here’s what we’ll be looking out for:

1. Tax credit heist Everyone agrees that tax credits need reform: they started out as a means of encouraging work and ended up subsidising low wages. Five years ago, Osborne said that tax credit bills of £30bn were ‘unsustainable’ – but he sustained them at £30bn ever since (see graph, below). But here’s the problem: how do you solve this problem without creating a lot of pain? You can argue that wages are low because subsidy is high: take away subsidy and employers may be forced to jack up salaries. After a while. But the transition period would mean a lot of pain for a lot of people, and challenge the Tories’ claim to be the ‘Party of the Workers’ – how can you make this boast, while taking away so much cash from those who are doing the right thing? A lot of low-paid workers have been making financial plans for their family on the basis that they’d continue to have this support. Better to phase out tax credits, putting new workers on a new regime, rather than tear them away from people whose families need them. We’ll see which option Osborne takes.

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2. The sneaky post-election tax rise Remember the fuss that George Osborne made about not raising taxes? But there’s still wriggle room: he only promised not to raise certain taxes (income tax rates, NI and VAT). As the below graph shows, chancellors always cut taxes before elections – when they’re trying to make nice with voters – and then usually jack them up straight afterwards. For what it’s worth, I don’t think Osborne will pull this particular trick: the economy is strong and tax receipts are ahead of budget, so he doesn’t need to. But we’ll update this graph tomorrow to see how it looks. Screen Shot 2015-07-07 at 11.22.263. Minimum wage Osborne has no control over the minimum wage: that is, quite rightly, set by the Low Pay Commission. But here’s the thing: a rise in minimum wage would save the government a mint but not help the worst-off. Watch out for attempts to order this salary up: it’ll sound like a move intended to help workers, but in a shameful number of cases it will help the government more. Consider a couple with two children working 36 hours a week in rented social housing*. If you raise them from the minimum wage (£6.50) to the living wage (£7.85) do they get a £1.35 an hour rise? Nope. The government gets to keep £1.16 of that rise via lower in-work benefits. The actual workers get to keep a mere 19p. So if there is a move on the minimum wage, let’s remember that in too many cases, it’ll help Osborne more than the actual workers. To Osborne’s credit, he didn’t match Ed Miliband’s pledge for an £8 minimum wage by 2020. This was a fake promise: since its inception, the minimum wage has trailed economic growth (but has fallen behind a bit recently). So on current trajectory, you can expect it to be above £8 by 2020. The Treasury may be advising Osborne to repeat this trick: if so, don’t be fooled. Screen Shot 2015-07-07 at 11.26.134. Pensions raid It’s said that patriotism is the last refuge of the scoundrel. Untrue: pension funds are. Just ask Robert Maxwell. The government has no money left, there’s a huge chunk of it in people’s pension funds. Look out for a pensions raid, of sorts.

5. Ending the rollercoaster In Osborne’s last budget, he wanted to stop Labour saying that he’d cut spending to the lowest level (as % of GDP) since the 1930s. So he scribbled in a bizarre spending hike for 2019/20, which no one really believed. Look at the below chart: why spend four years of cuts, followed by a splurge? At the time, the OBR said this was a ‘rollercoaster’ and not to be taken seriously. We’ll see tomorrow whether Osborne publishes a more credible fiscal trajectory. Screen Shot 2015-07-07 at 11.20.52

* I’m grateful to Policy in Practise for this case study. It’s a brilliant outfit, that models the impact of welfare changes and manages to make sense of the hideously complex trap that we have created for the low-paid.

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