Leading article

Osborne's living-wage wheeze will decide the fate of one-nation Conservatism

The Chancellor's big idea does less for the working poor than you might think – but it's still a decisive change

11 July 2015

9:00 AM

11 July 2015

9:00 AM

In his hastily scripted victory speech, David Cameron hit upon a mission that he wanted to define his remaining years in office. ‘I want my party, and I hope the government I would like to lead, to reclaim a mantle that we should never have lost: the mantle of one nation,’ he said. The problem was obvious: how could he reconcile this phrase with the hideous financial decisions that he had to make in office? With having to decimate not just unemployment benefits, but the support given to the millions trapped in low pay?

George Osborne started to give his answer with his Budget this week. His main decision was a to introduce a new ‘living wage’ of £7.20 an hour, rising to £9 an hour by 2020. This was treated with jubilation on Tory benches, but is not quite as generous as it sounds. The UK’s complicated tax credit system means that this will, in many cases, benefit the government more than it does the worker — some workers will keep as little as 15p in every extra pound of salary. The remaining 85p is lost in welfare withdrawal, and will go the Treasury’s coffers. But the Treasury certainly needs the money.

Osborne’s lamentably slow progress in reducing the deficit over the past five years has simply delayed the problems to the next five: he has spoken the language of austerity while increasing the national debt by 40 per cent. Greece, he said in his Budget speech, shows that ‘if the country is not in control of the borrowing, the borrowing takes control of the country’. Is he aware that Greeks now have their deficit down to 0.8 per cent of economic output? Britain’s deficit is six times higher, a shameful 4.8 per cent of GDP. But because we’re not in the euro, the Chancellor will get away with it.

Let us be under no illusions: after five years of Mr Osborne’s austerity, Britain still has a bigger deficit than almost any other European country. We could close every school, open every prison, disband the military, shut every embassy — and still not be able to balance the books. Luckily, a glut in global debt markets means the government can borrow cheaply (at just over 2 per cent interest), so Osborne had given himself nine years to get back in the black. In this year’s Budget, he stretched it to ten years. And that’s before he has started to cut into the welfare bill.

Cash is not the same thing as compassion. The Labour party built the most expensive poverty in the world, trapping people in welfare ghettos or low-pay traps. Iain Duncan Smith’s welfare reforms led to a reduction in inequality, and the massive rise in child poverty that the had been feared has failed to materialise. Instead: a jobs miracle. As the Chancellor said, the proportion of Brits in work has hit a record high. We have created more jobs for Frenchmen than François Hollande; more jobs than the rest of Europe put together.

But so far, welfare reform has been more about saving lives than saving money. Assessing the millions on incapacity benefit for what work they can do is an expensive task. The Chancellor rather rashly promised during the election campaign that he would cut £12 billon from the welfare bill in two years; this has been softened, but there will still be cuts to tax credits. As the mission changes, the language must change too. The Chancellor is wrong to contrast ‘the hardworking taxpayer’ with those who receive benefits. The mess that Labour bequeathed means that millions of workers are dependent on benefits. A couple with two children, with a husband working 35 hours a week, could earn £11,150 from work but £13,200 in various benefits. In this way, even strivers end up dependent on the state for half the family income.

As the Chancellor said, this needs to change: pay needs to be higher, and welfare lower. The bill for tax credits has soared from £1 billion to £30 billion, which is plainly unaffordable. Everyone agrees that the government ought to help those who are unemployed, but why subsidise supermarkets who get away with paying the minimum wage, knowing that the government will top it up? So the case for reform is clear.

What’s less clear is how you proceed — without causing undue hardship to low-waged families who had come to base their budgets upon the tax credits which have ended up distorting the economics of the workplace. Osborne’s plan to phase them out via a four-year freeze, rather than tear them away, is wise. It will mean slower progress with the deficit, but is probably worth the price. Even with a lower target of £8 billion in cuts, there will still be much pain ahead — and freezing working-age benefits for four years will be progressively tougher. The Chancellor says that wages will rise to compensate — but that is a gamble.

This was perhaps the toughest Budget that Osborne has delivered: had he introduced these changes earlier, it would have been easier. But he faces almost no opposition now, with the Labour party in crisis and the Liberal Democrats fighting for their own survival. So he can afford to change his tone. He dismissed the ‘depressingly inevitable howls’ of pain that accompany welfare reform — he was thinking about his political opponents. But he ought to remember that the pain is felt by those on low wages, the people whom the Conservatives ought to stand full square behind.

So the next few years will not be a story of workers vs welfare claimants. It will be a mission to clean up the mess created by tax credits, without damaging the work incentive. Osborne has overseen tremendous amounts of job creation; he must now try to wean workers off welfare without pushing them back on the dole — or pricing workers out of the market. It will be a tough mission, but it will decide the success or failure of One Nation conservatism.

Got something to add? Join the discussion and comment below.

You might disagree with half of it, but you’ll enjoy reading all of it. Try your first 10 weeks for just $10

Show comments
  • Blindsideflanker

    ” or pricing workers out of the market. ”

    I believe that is precisely what we need to do. We need to drive up wages to force employers to invest in productivity. We also need to weed out a lot of low paid, low productivity, low value added jobs that cost the state to sustain. It is better those jobs go to developing countries, rather than have their people come here to do them at our cost.

    • fundamentallyflawed

      I don’t believe you can “price workers out of the market”.. The company either requires the employee or they don’t.
      Investment in productivity (the real driver of GDP growth) has stalled as its become cheaper to throw staff at problems

  • Dan Grover

    I just want to say that that’s an excellent photo.

  • Jonathan Tedd

    Read Tim Morgan’s blog for a reality check on UK plc.

  • CaseyAAvera

    High Quality performance spectator…. <…. Find Here

  • Yvon & Barry Stuart-Hargreaves

    Whatever Osborne has said about austerity ……..he has done the exact opposite.
    Even if he sticks to this latest plan (and he has reneged on every other one)he will only get Debt to GDP in 2020 back to same level as when he took power in 2010.
    The Tories have simply ballooned the debt by £650 billion and now aim to add another £140 billion in four years. Well done Gideon a doubling of UK debt in 9 years.

    • tjamesjones

      sigh. the deficit is the result of spending commitments made by current and past governments. it is not a one time event, it is built into the laws implemented as government policy stretching back over time. to reverse this, requires explicit and opposed changes. Osborne is slowly working his way through those changes, but he’s doing so at a rate that he judges the economy and the polity can handle. we live in a democracy under law and we have a government that is by far the most sensible of those we had to choose from in May.