George Osborne’s second budget of the year has produced much comment and even those who are critical of it have to admit that he has been bold. It is extremely complex and George’s budget speech does not do justice to the full extent of the changes that he has proposed. All budget speeches are pure theatre with the need to spring a head-line grabbing surprise, in this case the introduction of the National Living Wage, which aims to trump the Labour opposition. The Chancellor is lauded for having purloined Labour’s clothes, as if Labour had invented the Living Wage. Even the Civic organisations that have championed the Living Wage are johnnie-cum-latelys, and years behind Pius XI who promoted the concept of a fair Family Wage in the 1930s. Osborne’s renaming of the Minimum Wage does not make it a real wage that an individual can live on and it is nowhere near the amount that would enable a traditional family to follow a traditional lifestyle. What he has done is reset the minimum level for next April at the amount it would have been at if it had kept pace with inflation. To be a real Living Wage it would be necessary to add another 80p to the £7.20, and by 2020 his target of £9.00 would need to be at least £10.00.
He has amended the remit of the Low Pay Commission with the aim to maintain the NLW at 60% of the median of national earnings and it is to be hoped that the yearly uprate continues to be in April instead of October. Taken with the decision to eliminate those earning NLW for 30 hours per week from paying income tax, it is indeed a bold move, but does not go as far as the policy we have been advocating since 2007. However, all is not as it seems. The Chancellor and the Treasury are the real beneficiaries. There is interaction with other measures, which have long-term and unintended consequences. In this respect it is par-for-the-course for George. The Summer Budget is too complex and contains too many changes, even though some are for implementation next year and beyond. HM Revenues and Customs will be strained and probably do not have the capacity to implement them all efficiently. There is a real danger that it will all unravel.
Having looked at the Treasury documents that support the Budget Statement it is difficult to believe that anyone can take it all in without getting a headache. The 100+ pages of the red book that puts the meat on the bones of the Chancellor’s Statement also includes graphs and projections. Separate documents set out the impact on households and another contains details of the financial consequences, including the comments and certification of the Office for Budget Responsibility. In addition there are eleven consultation documents. There is one welcome proposal to expand and make the Office of Tax Simplification a permanent feature. Other new quangos are Transport for the North and Transport for the Midlands. The net borrowing requirement is not shown on the pie chart, but works out at £69bn and is half of the total borrowing that is needed for this financial year. Interest on the National Debt for the same year is £36bn. Those are the two key figures to focus on. When the net borrowing figure falls below the annual interest figure, you will know that we are at last well on the way to a balanced budget with no deficit. As yet we have still got a long way to go. Eliminating the current account deficit has been delayed for a further year, but the projections still show the overall budget in surplus by 2020. This is highly unlikely. Be prepared for one last desperate and draconian heave in 2019-2020 if George is to retain any creditably, and any prospect of being Prime Minister in the next Parliament. With the shoe-in examples of James Callaghan and Gordon Brown in mind it might be third time lucky for an ex-Chancellor, but he should avoid the shoe-in [John Major was only Chancellor for one year and did win a real contest, so does not count].
George has been very busy this year. Prepared and presented the March Budget as a prelude to being the main architect of the Conservative Manifesto. Masterminded the Party election campaign and following a surprise victory helped draft the Queen’s Speech. Last month he delivered the annual Chancellor’s address to the City at the Mansion House before travelling to Austria the next day for the Bilderberg Group meeting. On returning, and as First Secretary of State, he stood in for David Cameron at PM’s Questions in the House of Commons. They are very much a duo and it is clear that Dave will make way for him at the right time. George is a man on a mission with a vision, but it is also clear that he does not think things through, probably not a chess player as he does not have enough time, and makes up policy on the hoof. With luck he may reach his destination, but only after some detours.
Is George an original thinker and what are his influences? He draws many of his ideas from history and that is no bad thing. He is influenced by greater thinkers and prone to learn at their feet, as witnessed by his membership of the Bilderberg Group. We have previously noted that he attended Bilderberg meetings in 2013, 2014 and 2015 alongside Shadow Chancellor Ed Balls. His membership goes further back than that, with attendances in 2006, 2007, 2008, 2009 and then as Chancellor in 2011 when he met Mark Carney. It has emerged that Ed Balls was also at the 2006 meeting when he was a new and lowly Economic Secretary to the Treasury. The Bilderberg Group hedge their bets; it does not matter where you are on the political spectrum, if you have the potential to be a mover and shaker you will get an invite. Interestingly, Dave Cameron has never been on the attendance list, but he did attend for one day only [7th June 2013] when the Group met at the exclusive Grove Hotel in Watford. Make of that what you will!
George, as Shadow Chancellor, was influenced by the Canadian model of economic and fiscal policy to the extent that he adopted it as his own. He was going to put the UKs house in order and tackle the problem of debt in the same way by savings of 80% on public spending and 20% by tax increases. There was a fly in the ointment – the Canadians had a buoyant US for a neighbour, while the UK was neighbour to a floundering Euro Zone. Notwithstanding, he has pressed on at a slower pace, with the 2015 Campaign proclaiming that future savings would all be by reducing public spending with no tax increases. The red book tells a different story. Public spending is only decreasing as a % and not in real terms, as he is only reducing the increase in spending. Increased taxation plays a substantial part in the attempt to balance the books. Even with the income tax changes there will be a much greater reliance on the overall rising level of Income Tax, which in 2016 will comprise 25% of the Treasury income. At the same time Corporation Tax, although the rates are being reduced, shows only a marginal increase. The gap between the take of both taxes is getting wider, so that by 2020 the take from IT will be five times higher than from CT. There will be a public backlash. Corporations avoid and evade the tax now without much regard for attempts to make them pay their fair share in return for all the benefits they enjoy. This will be perceived as grossly unfair, with demands that they pay-up. New, small and medium businesses do need special consideration, but large and multi-national corporations need to be challenged with regard to their attitudes. In the extreme there are some CEOs, like Sir Martin Sorrell, who think governments should pay them to provide jobs.
Rather than being bold, their 2015 Manifesto seems to be too timid. While there was a declaration of support for a living wage, the actual commitment was for a No Tax Minimum Wage and a target of £8.00 by 2020. This was to be enacted by binding legislation. They promised not to increase VAT, Income Tax or National Insurance contributions, but it was only during the Campaign that they made the commitment to enshrine the promise in legislation. They were clear about eliminating the deficit, but the Manifesto did not go as far as proposing legislation to bind government to prudent balanced budgets. That came later and was included in the Queen’s Speech with his plan to pass a law committing future Chancellors to run a surplus in normal times. George went even further in his Mansion House speech. He announced the resurrection of the Committee of the Commissioners for the Reduction of the National Debt. The Committee was set up in 1786 by William Pitt the Younger and last met in 1860, but there was a get together for an anniversary dinner in 1986. Following the 2010 General Election he reconvened the Star Chamber to force through budget cuts by reluctant ministers, so it is all very symbolic and historical.
This months meeting of the Committee has been dismissed as ceremonial rather than practical, but that is not really George’s style. He only does things for a purpose. The make up of the Committee gives some clue as to that purpose. In addition to the Chancellor it includes the Governor of the Bank of England and his Deputy (in fact there are now three deputies), together with the Speaker of the House of Commons and the Lord Chief Justice. The CRND is now part of the remit of the UK Debt Management Office. My guess is that given the independence of the BoE, and all the responsibilities for monetary and financial policy that have been devolved to it, that this could be the forum whereby the Chancellor exerts some direction and decision about the winding-up of Quantitative Easing and the best option for exiting the asset purchase programme.
It might seem crass to complain that politicians are doing more than they promised, but there is a need to read between the lines. Some of the Tory Manifesto promises have already been ditched, delayed or manipulated. Since their surprise victory Dave and George have declared simply and strongly that they are moving to a High Wage, Low Tax, Low Welfare economy. They should have been just as clear and unambiguous in the Manifesto and during the Campaign. They should also make clear that the employers will pass on the cost of the NLW to consumers, with a consequent rise in the cost of living.