Osborne's measures 'likely to increase inequality', says NEF

By staff writers
July 8, 2015

Chancellor Osborne’s measures spelled out in the 2015 Summer Budget "are likely to worsen levels of UK inequality", says a senior spokesperson for the New Economics Foundation (NEF).

In a budget response, NEF says: " Low earners will see a direct hit to their finances, but because many of those moving on to the 'National Living Wage' level will be second earners in a household, many of those at the top end of the income scale will actually stand to benefit."

The government’s forecasters, the Office for Budget Responsibility (OBR), have modelled for this impact. They believe that “around half the cash gains in household income may accrue to the top half of the household income distribution.”

"It’s clear the bulk of the gain flows disproportionately to wealthy households," says NEF. "This wouldn’t matter too much if the tax and benefits system operated to redistribute in favour of the poorest. But Osborne’s changes to tax credits will most likely have the opposite impact, although it’s currently hard to know for certain – the Treasury’s usual 'distributional analysis' accompanying the Budget has undergone significant change from previous years. Further work will be needed."

NEF senior economist James Meadway continues: "Alongside cuts to benefits, Osborne has also introduced a further cut to Corporation Tax (CT). Already among the lowest headline rates in Europe, the cut from 20p to 18p over two years will mean only Estonia and Ireland rank lower.

"The US headline corporation tax rate is 40p. In Germany it is 33p. There seems to be no reasonable grounds for thinking the UK should be setting so far out of line with similar economies, and the result, overall, has been to weaken the tax base and therefore weaken the government’s spending capacity."

The overall decline in revenue from CT is a serious inhibitor to restoring the health of the public finances, says NEF.

Meadway continues: "The effort to restore those public finances to a stable position is given as the motivation for what will, assuming Osborne’s targets are achieved, be a full decade of continual austerity by 2020. Osborne has somewhat softened the pace of spending cuts for this budget, smoothing out what would otherwise have been a similar pattern of steep cuts to those seen over 2010-2012, and aiming for a budget surplus by 2019-2020, a year later than originally planned. Only half of the cuts have been presented in this Budget; the rest will have to wait for the spending review, due in autumn this year."

"Osborne didn’t achieve his deficit reduction target over 2010-2015, and there is no reason to suppose he will this time, either. Another recession would knock all spending plans off course; turmoil in the eurozone, or in China, could easily spill over here. And an important but often overlooked side-effect of Osborne’s spending cuts is the impact they are having on household debt."

OBR analysis suggests that household debt is expected rise even above the record levels seen prior to the crash of 2007/8.

"This rise in household debt is the direct effect of government spending cuts", declares the NEF economist. "As government spending is pulled back, some other part of the economy has to step its spending up to compensate, or else the whole economy would be pulled into recession. That response is predicted to come from households, who have shifted, in the aggregate, from repaying their debts to taking on more loans."

NEF also critiques the notion of surpluses while debt is so high.

"A government serious about its responsibilities would not, given this likely impact, be seeking to proceed with its austerity programme in the way this new government is. Far better to ease off on spending cuts and think more creatively about how government could use its powers than to work on the assumption that its spending, rather than its saving, was the main problem. Short of that, we are heading, slowly but surely, for a fresh round of debt crises", concludes James Meadway.

NEF is a leading think tank promoting social, economic and environmental justice. Its aim is to transform the economy "so that it works for people and the planet".

* New Economics Foundation (NEF): http://www.neweconomics.org/

* Full 2015 budget coverage and commentary from Ekklesia at: http://www.ekklesia.co.uk/budget2015

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