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Osborne puts pay at heart of Budget

Published 08/07/2015

Chancellor George Osborne will set out his first Tory-only Budget
Chancellor George Osborne will set out his first Tory-only Budget

George Osborne used the first Tory-only Budget for nearly 20 years to introduce a compulsory "living wage", dramatically declaring that "Britain deserves a pay rise".

Hailing a new "higher wage, lower tax, lower welfare" Britain, the Chancellor said from next April everyone over 25 will be entitled to £7.20 an hour - and the figure would rise to £9 by 2020.

Some six million people will see their pay increase as a result - and those currently earning the minimum wage of £6.50 an hour will be £5,000 better off by 2020, he claimed.

Work and Pensions Secretary Iain Duncan Smith punched the air in triumph at the announcement, which sweetened the pill of welfare cuts totalling £12 billion also announced by a Chancellor no longer constrained by Liberal Democrat coalition partners.

But Labour accused Mr Osborne of "trying to pull the wool over people's eyes" by rebranding the national minimum wage as a "living wage" while at the same time slashing benefits for the working poor.

Mr Osborne confirmed his intention to run a budget surplus by the end of the parliament, but took advantage of an unexpected tax windfall to put back his target date by a year to 2018/19 after growth forecasts for this year were downgraded.

The Chancellor will save £3.9 million by freezing all working age benefits for four years, while support for families through tax credits and universal credit will be restricted to the first two children from 2017. The level at which workers start losing tax credit will be reduced to £3,850, saving £3.3 billion.

Mr Osborne confirmed that the benefits cap is being reduced from £26,000 to £23,000 in London and £20,000 in the rest of the country. Under-21s will no longer be automatically entitled to housing benefit. And university maintenance grants will be replaced with loans.

In a step that will intensify fury over plans to give MPs an 11% pay rise this year, public sector employees now face four more years with increases capped at 1%. Cuts totalling £20 billion to Whitehall departments will be announced in the autumn, though Mr Osborne delighted Tory backbenchers by announcing he will protect military spending and meet Nato's target of spending 2% of GDP on defence every year to 2020.

As an anti-austerity protest took place outside parliament, Mr Osborne told MPs that Britain had 1% of the world's population, 4% of the world's income, and 7% of the world's welfare spending.

"It is not fair to the taxpayers paying for it. It needs to change," he said. "Welfare spending is not sustainable and it crowds out spending on things like education and infrastructure that are vital to securing the real welfare of the people."

But acting Labour leader Harriet Harman claimed the Budget was "making working people worse off" by cutting support for the low-paid.

Labour described the tax credit cuts as a "work penalty" on the low-paid, arguing that three million working families will lose a total of £4.5 billion, with a lone parent of two children earning the minimum wage losing twice as much in tax credits as she gains from the move to the living wage.

But Mr Osborne insisted: "Taken together with all the welfare savings and the tax cuts in this Budget... a typical family where someone is working full-time on the minimum wage will be better off." Some nine out of 10 families had been eligible for tax credits in 2010, he said - but in future they will be available to five out of 10.

The Office for Budget Responsibility has estimated that the new living wage will cost around 60,000 jobs and reduce hours worked by four million a week. But Mr Osborne said the OBR was still predicting one million more jobs in total by 2020 as growth continues at 2.4% a year to the end of the decade.

He announced a cut in corporation tax rates from 20% to 19% in 2017 and 18% by 2020, as well as cuts in national insurance contributions for smaller firms.

Arguing that the "best way to help working people is to let them keep more of the money they earn", the Chancellor also announced increases in income tax thresholds.

The personal allowance below which no income tax is payable will rise from £10,600 to £11,000 next year, and the threshold for the 40p higher rate from £42,380 to £43,000. Mr Osborne said the increases were a "down-payment" on pledges for them to hit £12,500 and £50,000 respectively by 2020.

He announced a simplification of vehicle excise duty which will see all revenue ring-fenced for road improvements, and confirmed he was fulfilling the Tory pledge to take estates worth up to £1 million out of inheritance tax - paid for by cutting pension relief for top earners. Special arrangements will mean parents are able to take advantage of the allowance to the value of their former family home even if they have "downsized" after children move out.

Permanent non-dom status will be abolished and the Exchequer will seek to recoup £5 billion from a crackdown on tax evasion.

Critics immediately highlighted that the NLW was significantly below the existing non-compulsory living wage rate of £7.85.

But Federation of Small Businesses chairman John Allan said the prospect of the new compulsory rate would be "challenging" for bosses, while CBI director-general John Cridland, described the Chancellor's statement as " a double-edged Budget for business".

"Firms will welcome measures to balance the books and boost investment, but they will be concerned by legislating for wage increases they may not be able to deliver," said Mr Cridland.

TUC general secretary Frances O'Grady said Mr Osborne had "finally woken up to the fact that Britain needs a pay rise", but added: "The Chancellor is giving with one hand and taking away with the other. Massive cuts in support for working people will hit families with children hardest.

"Massive tax cuts for the wealthiest show the Conservatives are still the party of the inheritors, rather than the workers."

The director of the respected economic think tank the Institute for Fiscal Studies (IFS) said Mr Osborne should have been bolder in his reforms to the tax system.

Paul Johnson told the BBC: "What's a bit disappointing is that he doesn't really have anything that looks like a strategy for a significant change to the tax system. We don't have anything laid out here which tells me that at the end of this parliament we will have a more sensible tax system than we had at the beginning of it.

"The one potential difference to that is he is saying he is going to consult on some really big and radical changes to the way we tax pensions. Whether that will come to anything, I don't know."

T he OBR said Mr Osborne had used his Budget to "loosen significantly the impending squeeze on public services spending that had been pencilled in by the coalition in March", financed by welfare cuts, net tax increases and three years of higher borrowing.

The budget watchdog's chairman Robert Chote said : "The Chancellor's biggest single decision in this Budget has been to increase the provisional plans for public services spending over the current parliament by more than £83 billion in total, compared to the coalition's plans in March.

"The biggest increases are in the middle years, where the coalition had pencilled in particularly sharp cuts.

"In addition to this extra spending, the Chancellor has also announced a series of tax cuts that will cost more than £24 million over the same five years."

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