Leader: What is needed is not a smaller but a smarter state

If George Osborne was a principled fiscal conservative he would have proposed reducing expenditure on pensioners. Yet, for entirely political reasons, he refuses to countenance the withdrawal of universal benefits from the wealthiest pensioners.

The Treasury in December 2013. Photo: Alastair Grant/AFP/Getty.

For a government seeking to reduce public spending, there is no easier target than welfare. Polls show that British voters overwhelmingly favour reduced benefit levels, and the poor cannot deploy armies of lobbyists to plead their cause. So it was disin­genuous for George Osborne to boast in his speech on 6 January of confronting “hard truths” when he promised £12bn of further welfare cuts from 2015-2017.

Equally cynical was his decision to signal that the young would be targeted first, with the abolition of housing benefit for under-25s. Were he a principled fiscal conservative, he would have proposed reducing expenditure on pensioners, who accounted for £107.6bn of last year’s £201.8bn social security budget. Yet, for entirely political reasons, he refuses to countenance the withdrawal of universal benefits, such as free bus passes, free television licences and the winter fuel allowance, from the wealthiest pensioners. Less wealthy pensioners should of course be protected.

At the same time, he has pledged to maintain the “triple lock” on the state pension, so that it rises in line with whichever is higher – inflation, earnings or 2.5 per cent – while capping working-age benefit increases at 1 per cent. With the over-65s more likely to vote than any other age group (76 per cent turned out in 2010, compared to 44 per cent of 18-to-24-year-olds), the need for the Conservatives to win back thousands of these voters from the UK Independence Party takes precedence over the need for deficit reduction.

Mr Osborne’s greatest act of conjuring was to create an artificial divide between the “hard-working people” who pay taxes and the “feckless” who claim benefits. That it is the working poor who are increasingly reliant on tax credits to subsidise low wages and housing benefit to compensate for extortionate rents is a “hard truth” the Chancellor refuses to acknowledge. As the Joseph Rowntree Foundation recently reported, in perhaps the grimmest statistic from the age of austerity, more than half of all children and adults living in poverty are now from working households.

If the Chancellor’s Labour and Liberal Democrat critics are right to assail him for all of this, they cannot ignore the indisputable truth that Britain remains a significantly poorer country than it was before the financial crash. The Office for Budget Responsibility has revised its national growth forecasts upwards but its estimate of the size of the structural deficit (the part of the deficit that persists regardless of the level of economic output) is no better than before, at 4.4 per cent of GDP.

For Mr Osborne, this is a licence for permanent austerity and a major reduction in the size and scope of the state. While politically sensitive areas such as the NHS, schools and pensions are ring-fenced from cuts, all other departments will be reduced to their smallest size since 1945. Yet it is not a radically smaller state that Britain needs but a smarter and more competent one.

A smarter state would invest more in pro-growth areas that support lasting prosperity, such as infrastructure, skills, job creation and childcare. It would focus on prevention rather than cure, by switching spending from housing benefit to housebuilding and by incentivising the use of the living wage, rather than subsidising poverty wages. If the short-term costs are higher, so are the long-term savings.

A smarter state would begin to shift the tax burden over time from income towards wealth, most notably property and land. Wealth taxes are pro­gressive and harder to avoid than those on income; they benefit the economy by shifting investment away from housing and into wealth-creating industries.

No one can now accuse the Conservative Party of con­cealing its true intentions and vision for the future. It is one in which, as the Institute for Fiscal Studies has said, the burden of austerity falls hardest on the working-age poor and those most in need. The danger is that a pessimistic electorate concludes that all this remains a necessary corrective to years of Labour profligacy.

To forestall this outcome, Mr Osborne’s opponents must put forward with no less conviction their own accounts of the state and how they would protect the poorest while also displaying fiscal responsibility. Gordon Brown once spoke of “prudence for a purpose”. It was not a bad slogan.