The Living Wage Political Thunderbolt That Masks an Otherwise Very Tory Budget

You've got to hand it to the man, George Osborne’s Summer Budget left even the most ardent lefty shell-shocked by the announcement to introduce a living wage — taking the minimum wage to £9 an hour.

Mr Osborne delivered what Ed Miliband would have only dreamed of putting in the last election manifesto. Semantic debates are likely to follow on whether it really is a living wage or just a charged-up minimum wage, but there will be no escaping that the hourly rate of pay for the over 25s will increase by almost 40% by the time of the next election in 2020.

It was a thunderbolt announcement that stunted the Labour Party’s response, and the reason is because it actually makes sense. Of course companies should pay employees properly for their work without the need for a government top up. The policy, Mr Osborne said, would erode corporate profits by a mere 1%, and it’s come at a cost of exactly zero pounds to the Treasury.

But the genius of the living/minimum wage announcement is that it has provided the Chancellor with the political cover for doing the thing he likes to do best: shrinking the state.

For every pound that Mr Osborne is raising in extra taxes to reduce the budget deficit, he will be cutting almost two pounds in government spending so that by the tax year that starts in April 2020, the nation’s annual overdraft will be reduced by almost £19 billion, of which almost £12.5 billion will be in spending cuts and almost £6.5 billion from tax increases.

That’s what makes this a truly Tory budget. It's a small mercy that Mr Osborne didn’t leave it at that otherwise the effect on those earning the lowest wages would been truly devastating.

it’s worth remembering that this was a state-shrinking budget, which puts too much of the burden on the poorest It’s worth looking at the measures announced by Mr Osborne, starting on page 72 of the budget document. Tax credits cut by £7.3 billion, welfare payments cut by £4.5 billion, housing benefits cut by almost £2 billion, the £745 million cut to the BBC budget. You get the sense that he is having fun.

Having pumped the housing market in previous budgets to get the Conservative Party over the line at the election, at least this time Mr Osborne has refrained from such kamikaze policies. But while he has held back from further inflating the market, he has also done little to correct it. Research by Fathom Consulting suggests that the measures aimed at curbing buy-to-let landlords will be equivalent to increasing interest rates by 0.5 percentage points — hardly enough to do the job. House prices overall will increase by about 5% each year over the next five years.

Further, and in typical understated civil servant language, the government’s forecaster the Office for Budget Responsibility said that, “there is a risk that the greater flexibility over people’s access to their pension assets that came into effect in April 2015 could affect the housing market via buy-to-let purchases.”

Despite all the big words about rebalancing the economy and Northern Powerhouses, British households - not the government but us, the people - will continue to spend more than we earn. The debt-to-income ratio will increase by 26 percentage points so that household debt will reach 167% of income, roughly where it was before the financial crisis. That’s a bit lower than the government thought it would be a year ago but way above what has been the norm since World War II or what economists deem to be sustainable.

Mr Osborne has pulled off a political blinder - to use the technical term - with his announcement on the living wage, and it’s an announcement Labour would have been proud of, not only for helping poor workers but for shifting the burden on to employers. But while everyone has their eyes fixed on that, it’s worth remembering that this was a state-shrinking budget, which puts too much of the burden on the poorest and leaves the underlying problems of the UK economy pretty much untouched.

More about the author

About the author

Gonzalo is the founder of Disclaimer Magazine and heads up our art features. He has covered politics and economics for almost two decades, including nine years as a reporter for Bloomberg in the House of Commons and, before that, he worked for Dow Jones and The Wall Street Journal. As well as his work at Disclaimer, Gonzalo advises NGOs on communications and policy.

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