Why George Osborne's headline-grabbing claims are wrong

The Chancellor is fooling us with his statements on welfare, the higher tax rate and spending cuts

Ben Chu
Saturday 04 October 2014 20:06

Three strong fiscal propositions emerged from last week's Conservative Party conference. First, that job-dodging scroungers have pushed up the working-age welfare bill into the stratosphere. Second, that an army of modest earners have been sucked into the higher income tax rate bracket. Third, that £25bn of further spending cuts will be needed in the next parliament. But don't take any of those propositions at face value.

Consider the working-age benefit argument. George Osborne lamented in his conference speech that "too many young people… have fallen into a culture of welfare dependency and a life on the dole". He said it was intolerable that the working-age welfare benefit bill had reached £100bn. But Jobseekers' Allowance, the dole, accounts for less than 5 per cent of that £100bn. The big contributors to the working-age welfare bill are housing benefit (£17bn), tax credits (£29bn) and child benefit (£11bn).

What drives housing benefit is rising private sector rents, linked to the spiralling value of housing – a consequence of not building enough new homes each year. Tax credits are rising because an increasing number of people in work are eligible for the earnings subsidies. And child benefit is not a subsidy just for the jobless.

The working-age welfare bill has certainly increased. It's up from 4.5 per cent of GDP in 1997 to around 5.7 per cent today. But it has grown as a share of national income primarily because of our grossly dysfunctional housing market and a surge in the number of people working in relatively low-paid jobs. The idea that the bill has been pushed up by a proliferation of lazy work-dodgers is nonsense.

If the Chancellor were serious about curbing the working-age welfare bill he would be allowing councils to build council houses again and pressuring firms to invest more of their profits in training for the workforce, which would enable their pay to rise. But, instead, Mr Osborne reached for a headline-grabbing – and fiscally irrelevant – initiative to reduce the maximum amount a family can claim on benefits to £23,000. This is a policy in search of a fiscal justification.

What about the income tax burden? David Cameron complained in his own speech that teachers and police officers are being sucked into the 40 per cent tax rate, which he said "was only supposed to be paid by the most well-off people in our country". How can teachers and police officers be rich? By earning considerably more than the national average.

Look at the income distribution published each year by the tax office. People with incomes above £41,900 a year, the threshold where the 40p tax becomes payable, are in the top 25 per cent of earners. The median pre-tax income in Britain is just £22,200; 80 per cent of the country's 30 million taxpayers pay at the 20 per cent basic rate.

Those who would benefit from the Conservative pledge to lift the threshold for the 40p rate to £50,000 would, in all likelihood, be in the top 15 per cent of the country's earners. They may not feel well off but, by any objective analysis, they are.

Incidentally, the biggest beneficiaries of Mr Cameron's other pledge, to increase the tax-free personal allowance for income tax from £10,500 to £12,500, would not be those families with the lowest incomes, as the Prime Minister implied, but families in the middle of the income distribution, as they tend to contain two earners.

Last, but not least, consider the £25bn of spending cuts. The figure has been touted by George Osborne and David Cameron as a "Treasury figure". But you won't find it in any of the published Budget documents. After much probing I found that officials make questionable statistical assumptions which have the effect of underplaying the size of the cuts that have been pencilled in. The Institute for Fiscal Studies calculates that the consolidation necessary to generate a budget surplus in 2018-19 is, in fact, £38bn.

Mr Osborne said that continuing the squeeze on Whitehall departmental spending over the first two years of the next parliament would deliver £13bn of savings. But that's merely the gap between the Treasury and the IFS estimate of the total cuts needed.

In any case, there's no economic imperative to balance the books by 2018-19. The Government can still borrow for the long term at near record-low interest rates. Fiscal consolidation can be completed over a longer period without the world coming to an end. And tax rises can – and should – contribute to closing the deficit too.

The next election is rushing to meet us. The economy, living standards and the size of the state look set to be key battlegrounds. How depressing that those battlefields are already blanketed by a thick fog of misinformation.

Hamish McRae is away

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