George is Missing a Trick

By Jack Peat, Editor of The London Economic 

I loathe George Osborne with a passion I reserve only for the devil’s disciples themselves (cite Boris Johnson, cite Boris Johnson, cite Boris Johnson). For six years he has removed the heart from the British economy, selling off the only profit making parts of the public sector to university chums at the heart of the crisis that crippled the public purse in the first place. Austerity has accompanied growing national debt and weak economic growth, house prices are at unattainable levels for British citizens and most recently he put forward brutal plans that would push 200,000 children into poverty. If there was ever a man that had a space reserved in the deepest, darkest depths of hell, it is he.

Yet, by his own design, he doesn’t have to be so brutal.

The concept of a high pay, low welfare, low tax economy is one most people can subscribe to. It forces business to play a responsible hand in the economy, fronting the costs for capitalism as well as reaping the rewards from it. If that were to work and if he could indeed create a healthy and fair jobs market then the state wouldn’t be forced to supplement the cost of unemployment or low-pay/ low-hours employment and our tax bills would be reduced.

But he clearly doesn’t have faith in the idea. If he did, he would allow the number of people on tax credits to be cut organically. As things stand you can get some measure of working tax credits if you work at least 16 hours a week and earn less than £13,253. But that threshold is based on a working economy earning a National Minimum Wage of £6.70 which will soon be replaced by a National Living Wage. In theory, that should remove the requirement for working tax credits, which are designed to supplement wages that don’t meet that requirement.

Which begs the question of why Osborne is looking to cut working tax credits early. If he truly believes high pay can substitute high welfare, then why not allow it to naturally do that rather than forcing its hand?

Perhaps the reason is that the National Living Wage as proposed by the government isn’t a real reflection of the National Living Wage. Under Osborne’s plans the rate would start at £7.20 an hour, followed by a series of stepped increases expected to take the rate above £9 an hour by 2020. But the current Living Wage (i.e the one calculated independently according to the basic cost of living in the UK) is £8.25 an hour and £9.40 an hour for people living in London. It will take five years for Osborne’s pay deal to reach that rate under the current plans.

Under Osborne’s, albeit contested, course of action, the average household in receipt of tax credits will lose a whopping £1,350 a year when they are cut in April 2016. The use of food banks will rise dramatically, say The Trussell Trust, 91 per cent of homes in the poorest parts of Britain will be worse off, say the Trade Union Congress, and even our soldiers could be left £2,000 a year down due to the ill-timed drop. That fundamentally undermines the Tory mantra that high wages can lead to lower tax and less welfare.

While you think about that, consider this. If George Osborne really believes in the aforementioned principal of governance, why not let it just work? Higher wages mean less dependence on state subsidies, but the latter must follow the former and not the other way around.