There was a lot to take in after the Chancellor delivered the first Conservative-only budget in 19 years. Overall I think it was good budget but it could have been better. Therefore, I will list the most positive and most negative take-a-ways from the budget.
1. Getting people off welfare. So far, the crowning achievement of the Conservative led government has been the “British jobs miracle.” Because of the government’s policies of taking the poorest earners out of tax and slashing welfare benefits, Britain now has record employment at 73.4%. This budget goes even further than the tough welfare cuts of the coalition. It cuts £12 billion from the welfare budget and set a new welfare benefits cap at £20,000 (23 in London). Furthermore, the government’s slashing of Gordon Brown’s tax credit system is a very welcome step. Tax credits had been subsidising employers to keep wages low and have spiraled out of control from what they were intended to be for. At the moment, nearly 5 out of 10 people are receiving some sort of tax credit, and during the recession it has been claimed than 9 out of 10 people was eligible. The chancellor is right to put an end to this dependency on the state, although his replacement step of a higher minimum wage is questionable (it’s discussed later on). The shifting of financial responsibility from the state to the individual and their employers is a very welcome step in Britain’s continuing journey into being a world-leading economy. For the second year in a row, the UK will lead the G7 in growth. A country where the people are self-sufficient is a very positive step in making sure that leading growth continues.
2. Tax Cuts and a Property Owning Democracy. I was very happy to hear the Conservatives fulfilling their manifesto promises of raising the 40p threshold to £50,000 by 2020 and the raising of the the threshold to pay any taxes at all to the level of the minimum wage. Furthermore, despite some columnists claiming this was an old fashioned wet Tory budget or a New Labour one, Mrs. Thatcher would find a lot to admire and it had a lot of similarities to Nigel Lawson’s great 1987 budget.
Mrs. Thatcher called for a property owning democracy and this budget goes a long way towards bringing back that dream. First of all, this budget sold off the most government assets since 1987 (and will surpass 1987 later this year). Like the old “Tell Sid” sell off of British gas, the sell off of the remaining 22% part of the government’s ownership of Lloyd’s bank will be sold at a discount and to ordinary people first. The government has also sold off its remaining share in Royal Mail. Secondly, the government will extend Right-to-buy to council homes. This is the extension of Maggie’s vision when Right-to-buy first came about in 1980. This is also welcomed in that the government will end the scandal of rich people like the late Bob Crow living in council homes with the end of government subsidies for those on a higher income. Thirdly, Mrs. Thatcher would be proud that the government, led by the Thatcherite business secretary Sajid Javid, a self-made man from humble origins, cutting the red tape and allowing fast track approval for the building of houses on unused industrial brown space. Home ownership is currently at a 25 year low. Osborne is right to follow Thatcher’s path to restore the property owning democracy.
There are further tax cuts that are very welcome. Specifically, I welcome the abolition of inheritance tax for homes up to £1 million and the lowering of the corporate tax rate to 18%, the lowest in the entire G20. These moves will continue to attract businesses to the UK shores and allow families to pass on their homes- both welcome ambitions.
3. A Young People’s Budget. The left has been howling and crying that this budget is unfair to young people. On the contrary, I think the youth got the best deal of the budget. Specifically, the young are being taught to be self-reliant at a young age so that in future they will not depend on the state. Specifically, I like all three proposals the chancellor made for the young. The “earn or learn” policy for 18-21 year-olds is the perfect medicine they can be offered. It is absurd that a young and healthy person should start languishing on the dole before even attempting to start a career. Cutting them off from benefits is fair for them and the taxpayer. Secondly, denying those under 25 from receiving the new “living” minimum wage will make them more attractive to employers, especially small businesses, and allow them to develop employment skills from an earlier age. For example, imagine a small shop needs a clerk. They need someone to do the bookkeeping, inventories, and occasionally be on the floor dealing with customers. Ordinarily, a small business would probably look for someone older and with more experience. However, now that there is a higher minimum wage for those over 25, small shops will be more willing to take on a less experienced recent university graduate or young person in general. The small shop experience will give young people the tools to succeed in life. Finally, the budget is right to replace university maintenance grants to poor students with loans. Frankly, there are too many people in university who should rather have an apprenticeship or being doing something else. By replacing grants with loans, this is teaching poorer students financial responsibility and to weigh whether university is truly right for them. Further, it will probably encourage more people to major in business rather than say Gender Studies.
4. Meeting the 2% of GDP NATO target for at least the next decade. This is very welcome news. The world needs the British military to be strong and right now the world is an uncertain and often dangerous place. The extra spending each year will ensure Britain is capable of ensuring the safety of the realm and have modern equipment (such as the new aircraft carriers and Trident system) to fight in conflicts if that unfortunate event occurred.
1. The new “living” minimum wage. The part of the budget that got the most attention and headlines was the new minimum wage. The chancellor outlined a plan to have the minimum wage be £9 an hour by 2020 for those over the age of 25. (I put “living” in quotations because the new living wage will still be less than the minimum wage in 7 other G20 countries and less than the minimum wage in some US cities.) Now I understand the Conservative case for the living wage. Basically, the thinking is that a higher minimum wage will increase productivity, an area where the UK is lagging, take more people off of working tax credits, and force employers, rather than the state, to take care of the nation’s workers. Proponents of it include “squishes” like Tim Montgomerie but also include solid Conservatives like Iain Duncan Smith (as he made sure we knew) and Boris Johnson. Furthermore, this plan is very popular, at 80% in fact and is good at pushing Labour further into the political wilderness. However, my objection to the new minimum wage is three-fold.
First of all, I think this policy is short-sighted. I do not believe this policy will in the short term lead to greater unemployment. The UK economy is roaring ahead and the new wage will not fully come into affect until 2020. Furthermore, businesses “pain” will be offset by the £3,000 tax allowance. However, this policy flies in the face of Osborne’s policy of “fixing the roof while the sun is shining.” Like has been noted by the likes of Fraser Nelson and Allister Heath, the higher minimum wage will lead to greater unemployment once Britain faces an economic downturn. Wonder why France is more productive than Britain? It’s clearly not because they have a better work ethic (I mean they take a whole month off) but its because the few people that are in work are expected to do more because hiring new workers is too expensive with its sky-high minimum wage and unemployment rate. It’s a rule of basic economics that the more one pays a worker the more one expects that worker to do. So come a downturn, the first to be laid off will be the £9 an hour workers. They will be replaced either by cheaper under-25s or nobody at all.
Secondly, this policy will attract an even greater number of migrants. Britain is already being flooded with people from the poorer parts of the EU, coming from countries where wages are a fraction of what they are in Britain. The new higher minimum wage will encourage an even greater percentage of low skilled workers to come work in the UK, causing further strains on the NHS and other public services. Now, this problem would be lessened if Britain voted to leave the EU in the upcoming referendum. In fact, the new minimum wage makes it imperative that it does.
Thirdly, like Paul Goodman, I think a living wage could have been achieved more with a carrot than a stick. Why not give tax breaks to those who pay the living wage and tax penalties to those who do not? There the advantage would be to push companies into paying the higher minimum wage through incentive, but when the downturn comes again, those incentives could be removed to maximise employment during the tough times. Here, if the wage is statutory, employers do not have the option of slashing wages but will rather have to fire the workers because they will be too expensive to keep on.
2. Keeping the 45p rate. There is no economic reason to continue having the 45p band. None. George Osborne should know better, once he cut the 50p band to 45p tax receipts went up. Would it be politically unpopular to abolish it? Yes. But an election is 5 years away. Furthermore, the chancellor should be arguing, like Boris Johnson recently did, in the merits of the Laffer curve. Hopefully next budget he will scrap the 45p band.
3. The tax system is still far too complex and the budget contains far too many gimmicks. Having a complicated system does not benefit the “working people voters” the Tories are coveting, but rather benefits tax accountants and rich people who can hire tax accountants. Does a busy middle class person have time to pour over a complicated tax system to maximise his benefits and a return? No. But a tax accountant does! One of the examples of the stupidity of the tinkering was the abolition of the bank levy and the introduction of the bank “profit surcharge.” Do you know what the distinction is? Basically it is a move from tax on a bank’s balance sheet to taxing more of its profits. Its pointless, might jeopardise Britain’s place as the world’s financial leader, harms smaller lenders over bigger ones, and just gives clever accountants more work to do. Another example would be the increase on insurance premium tax. This would only hurt average people because insurance companies simply pass on higher costs to their policyholders (see US healthcare insurance). At the moment, premiums were falling in the UK. Osborne should have welcomed that rather seeing it as a clever way to get money to close the deficit gap.
Overall, this was a good budget. It goes a long way towards the Conservatives’ admirable goal of “high wage, low tax and low welfare” society. I further welcome the Chancellor’s move have a statutory requirement of a budget surplus in good economic times once he balances the budget by 2019. But Osborne needs to be moving towards a simpler tax code and cut further taxes in more areas. This budget is a start, but there is much more to do.