Will the budget succeed in derailing the UK economy?

By Savi Hensman
July 11, 2015

The Summer Budget produced by the UK chancellor George Osborne will, predictably, continue to widen the gap between the rich and the rest of the population. It may also fulfil economists’ warnings of further economic damage.

When a Conservative-led coalition took office in 2010, the economy was beginning to recover after a worldwide financial crisis. The new government’s disastrous commitment to austerity slowed this down to an extent never before achieved. It was the slowest UK post-recession recovery since records began in 1830.

Since May 2010, “real earnings – the difference between wage growth and price raises – have fallen by 3.4 per cent. Workers can buy less today with their pay packets than they could at the beginning of the recession... there has never been a comparable drop in real wages in any previous parliament,” wrote economist David Blanchflower in the Independent just before the 2015 election.

Heavy cuts in social security (often hitting families who had paid national insurance and other taxes for decades) and to services such as libraries and adult education deepened the misery.

Meanwhile the super-rich did extremely well. In 2014 the Sunday Times reported that the collective wealth of Britain’s thousand richest individuals and families had soared to £519 billion (not including bank accounts), double the figure five years before.

In effect money shifted from public services and ordinary people’s pockets – where it could have met needs and been recycled into the local economy – to the coffers of millionaires and huge corporations.

The Centre for Macroeconomics surveyed economists before the 2015 election. Less than a fifth thought that austerity had a positive effect on employment and GDP. An overwhelming majority believed that the outcome of the vote would have a further impact on the economy.

The Budget of July 2015 did include a substantial increase in the minimum wage (misleadingly rebranded a ‘living wage’). This will benefit some low-paid people. But large numbers will lose out overall because of real-terms cuts in working-age benefits, tax credits and local housing allowance.

Many households will also be affected by a steep reduction in benefit for sick and disabled people receiving employment and support allowance who are in the work related activity group, and by removal of automatic entitlement to housing benefit for those aged 18-21.

Meanwhile the inheritance tax threshold will be raised from £650,000 to £1 million for married couples passing on their family home, so that the rich can keep more of their assets. And corporation tax will be further slashed for profitable companies.

As Paul Johnson of the Institute of Fiscal Studies said, “the changes overall are regressive – taking much more from poorer households than richer ones.” In addition further public sector cuts and privatisation are likely to prove costly to ordinary households, as formerly free services are reduced or withdrawn.

It seems likely that widening inequalities will not only harm those on low and medium incomes but also continue to damage the economy overall. Some aspects of the Budget could prove particularly expensive to society.

From 2017-18, council and housing association tenants in England – except if permanently on very low incomes – will face rocketing rents or eviction unless they buy their homes. An estimated 340,000 households could be affected. (http://www.ekklesia.co.uk/node/21862)

“It’s not fair that families earning over £40,000 in London, or £30,000 elsewhere, should have their rents subsidised by other working people,” said George Osborne. But social rents are not subsidised, and in some cases bring in a modest surplus. The ‘right to buy’, however, does involve heavy subsidies.

If, say, a quarter of those whose homes were at risk were to buy these at an average discount of £70,000, the cost to the public would be about £6 billion. Also about 85,000 properties would be removed from the stock of social housing. Some buyers might default on their mortgages and the properties be bought by private landlords.

Budget measures also include an annual one per cent annual cut in social rents over four years, which will create problems for non-profit landlords. The statutory Office for Budget Responsibility estimates this will lead to 14,000 fewer homes being built, while the National Housing Federation predicts a loss of 27,000 homes.

Overall, the Budget will make some employers pay slightly more while cutting their taxes in return, but many ordinary households will suffer financially. The longer-term economic and social cost is hard to estimate, and some spiritual and ethical traditions would emphasise the risks to a society founded on injustice.

“Moving rapidly to budget surplus makes us more vulnerable to the next crisis by keeping interest rates low,” commented Simon Wren-Lewis, a Professor of Economic Policy at Oxford University, in the Independent. “Whichever way you look at it, the strategy of renewed austerity makes little macroeconomic sense. But this most political of Chancellors has never worried too much about that.”

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

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© Savitri Hensman is a widely-published Christian commentator of politics, religion, welfare and allied topics. An Ekklesia associate, she works in the care and equalities sector.

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