Osborne’s Budget will touch on social reform – but he’s no Lloyd George

A truly entrepreneurial  society requires fewer silver spoons in fewer mouths

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The Independent Online

Lloyd George’s first Budget speech, droning on from 3pm till 8pm, was described by his own backbench Liberal supporter, Hilaire Belloc, as “without exception the worst that has been delivered in the House of Commons”. This is the converse of the old adage that the Budget that looks good on the day can seem a lot worse in retrospect. For the 1909 Budget, which laid the first foundations of modern social security, became the most epoch-making of the 20th century.

It’s unlikely that Osborne’s Budget will be remembered for as long. But because it is the first that the Chancellor will deliver without coalition constraints it may help to define the Cameron majority government as Lloyd George’s did Asquith’s.

Even if next week’s Budget were not following on from events in Greece, which could heavily influence the economic climate, it would seem almost indecent to speculate on its contents before they start to leak. But one or two elements are emerging. The first is that in looking for £12bn cuts in welfare, the Government intends to target tax credits. This is a hard sell for a Government which says its cost-cutting drive will make work pay, because it will hit those already in work; making work pay, especially for those on low incomes, was an original purpose of the credits.

Which may explain the first signs of a noisy campaign against the unfairness of the taxpayer subsidising low private-sector wages. In the Daily Mail, David Cameron’s former adviser Steve Hilton, naming “giant companies such as Tesco and Sainsbury’s”, said that “supermarkets and other large firms take an unbelievable £11bn from the taxpayer, so they can get away with paying more than five million workers wages they struggle to live on”.

Hilton’s point is incontestable. But what will the Government do about this “travesty” beyond simply reducing the subsidies? Boris Johnson – to his credit a strong champion of the living wage (£9.15 an hour in London compared with a £6.50 minimum wage) – identified the problem, suggesting that low pay needed to be tackled “before we start hacking back on people’s in-work benefits”.

Of course, Osborne may sanction a further rise in the minimum wage above the 20p due in October. But that will hardly close the gap – up to £1,690 a year per family – that the Resolution Foundation calculates would be left by cutting child tax credits to 2003 levels (one option). This would affect mainly the poorest 30 per cent, besides disadvantaging households with children – an odd goal for the party of the family. In theory, the Government could jack up the minimum wage to living wage levels, using public procurement or tax reliefs – another cost – to spread the private-sector living wage. But apart from the threat to jobs, real or imagined, is Osborne really going to be that interventionist?

Maybe he has a cunning wheeze to square this circle. Otherwise, shouting the odds at skinflint employers, however justified, will be no more than picking a rhetorical fight with one sector to divert attention from happenings in another – in this case cutting the incomes of those who can least afford it.

Which throws into even starker relief the pre-election promise of a tax break for the best off. By exempting family homes worth up to £1m from inheritance tax (IHT), this would remove a revenue stream embedded in the system by Lloyd George’s Budget.

Treasury officials had already detailed objections to Osborne’s proposal: that “empty nesters” should not be deterred from downsizing and thus increasing the availability of family homes. So Osborne may consider widening the new threshold to cover all assets, not just family property.

When Cameron trailed a £1m threshold last year, the Institute of Fiscal Studies said this would “abolish IHT for all except a very small number of very rich families who do not plan their affairs in a tax-efficient manner”. Family estates liable for the 40 per cent tax – those above the current £650,000 threshold – had been projected to rise to just under 10 per cent by 2018-19, bringing £5.8bn into the Exchequer. With a £1m threshold, this would fall to just 0.7 per cent; even at the most conservative estimate the IFS said this would cost the taxpayer “more than £1.8bn”.

This is toxic for Labour. Osborne’s 2010 announcement of a planned £1m threshold helped to forestall an early election and persuaded Gordon Brown to raise it to its present level. The tax is unpopular – out of all proportion to the small minority actually affected by it. So there is no guarantee that Labour will oppose the change.

But that doesn’t make it right. IHT needs reform. It is too easily avoidable, not only through the scams of the very rich but by the much more acceptable exemption of gifts to family members within seven years of death. That period could be lengthened; or people could, as an IFS review suggested, be taxed at “progressive rates on the total amount of gifts and inheritances that they receive over their lifetime”. This happens in Ireland and was proposed by the more centrist Tory government of 1972.

But Cameron and Osborne have made clear they are against the principle of IHT, the latter arguing the change is needed to “support the basic human instinct to provide for your children”. Besides the strong egalitarian argument that the tax evens out – if only slightly – each generation’s life chances, there is also an impeccably right-wing one: that a truly entrepreneurial society requires fewer silver spoons in fewer mouths.

There will be much more in Osborne’s speech. And maybe the Chancellor will baulk at wholesale implementation of these proposals. But how he handles them will be one of many rough guides to whether he has produced a “truly liberal” Budget. With a small “l” of course.

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