Osborne Balances Tax, Welfare Cuts with “Living Wage”

George Osborne satisfies both rightwingers in his own party and outflanks Labour from the left.

Britain’s George Osborne surprised opposition parties on Wednesday by announcing a “living wage,” borrowing a left-wing policy proposal to offset deeper welfare cuts and tax measures that benefit middle incomes and corporations in what was the ruling Conservative Party’s first budget since it won reelection in May.

Unbound from his Liberal Democrat coalition partners, the chancellor announced plenty of policies to satisfy Conservatives: a commitment to meet NATO’s 2 percent defense spending target, a raise in the inheritance tax threshold for married couples from £650,000 to £1 million, an increase in the threshold at which the 40 percent income tax rate kicks in — which is expected to take 130,000 earners out of that tax band — and a reduction in corporate tax from 20 to 18 percent.

As expected, he also announced further austerity for those on welfare. Working-age benefits — with the exception of disability benefits and maternity pay — will be frozen for four years while Britons under the age of 21 will no longer qualify for housing benefits. Osborne said the welfare cuts would add up to £35 billion in savings by the end of this parliament.

But the budget was hardly an uncompromising, right-wing document.

Osborne said public spending would be £83 billion higher than he had forecast in March while the £24 billion in tax cuts he announced are dwarfed by £47 billion in tax increases, including higher charges on cars and insurance premiums.

The budget is not projected to reach surplus until 2019, a year later than Osborne planned before the election. And, as Frances Coppola points out at the Financial Times, meeting that goal hinges on growth averaging 2.4 percent for the next five years — which she thinks is “quite a gamble.”

Should there be an economic downturn due to European turmoil or fallout from China’s stock market collapse, further savings would have to be found to meet fiscal targets, putting Britain’s impressive growth record at risk.

Labour nevertheless singled out corporate tax and welfare cuts for criticism, saying Osborne was “making working people worse off.”

But under his proposal, minimum-wage earners will see their incomes rise from £6.50 per hour to £9 per hour in 2020.

Labour had vowed to increase the minimum wage to £8 per hour by 2020 in its manifesto.

The BBC’s Robert Peston argues it is “quite striking that a Tory government that says it fervently believes in markets is behaving like 1970s Labour in creating a new official living wage — because it represents an attempt to fix the price of most businesses’ most important cost, people, significantly higher than the current minimum wage.”

His colleague Iain Watson points out it wasn’t the only policy on which Osborne outflanked the opposition from the left. He also said he would abolish non-domiciled status for wealthy residents who have lived in the United Kingdom for at least fifteen out of the last twenty years.

In the last election campaign, Labour proposed to abolish “non-dom” status altogether.

In the Financial Times, Janan Ganesh argues that Wednesday’s budget should be seen within the context of Osborne’s ambition to transform the individual’s relationship with the state.

Osborne wants to leave behind a country whose citizens, compared with 2010, are less likely to be employed by the state and to rely on fiscal transfers for part of their income.

Hence Conservative support for a living wage. Better to take workers off benefits and raise their paycheck than tax their low pay first and then return part of it in the form of tax credits. The lower corporate tax should help employers offset the extra cost — which is a better policy than inventing some new subsidy for them.

For Labour, the budget was “a cold blast of reality,” according to Ganesh.

They did not just lose an election in May but perhaps an argument about the future of the state.

In the short term, their criticism of Osborne’s living wage is also damaging. Writes Dan Hodges in The Telegraph, “all people will see is the Conservative Party introducing legislation to force employers to raise their employees wages. And they will see Labour attacking them for it.”