Better than ever promised
Observations on the Budget (1). By Donald Hirsch
One of the oddest things about two terms of new Labour is the reversal of the old rule that when it comes to spending, elections over-pledge and chancellors under-deliver. In the parallel universes of Blair election rhetoric and Brown Budget Day practice, the contrast is between lack of commitment in the former and scale of ambition in the latter. Labour's first pledge card was a model of restraint: it wavered between the highly selective (limits on class sizes for infant schools formed the education pledge) and the unspecific (cut hospital waiting lists, but not by a set amount).
The 2005 version has degenerated into pure slogans: "Your family better off . . ." Gordon Brown didn't have a pledge card when he started as chancellor in 1997, but we can imagine what one might have said if he had. The main themes of his nine Budgets and four public spending reviews have remained remarkably stable.
After a short period fulfilling a pledge to worried Middle England to keep initially to Tory spending plans, the story has stayed the same for seven years, since Brown's first redistributive Budget and his first expansionary spending review, both in 1998. If he had then made the following five pledges, he could now congratulate himself on handsome delivery:
Steeply raise health spending. That is up to about 8.6 per cent of GDP from just below 7 per cent. That's more than it sounds: not only is the proportion of national income spent on healthcare up by a quarter, the economy itself has grown by nearly a quarter in real terms. We are now up to roughly the OECD average in health spending.
Substantially raise education spending. Here, the increase is more modest: from 4.8 per cent to 5.5 per cent of GDP, notwithstanding the Chancellor's ostentatious handouts directly to schools over the heads of local authorities, extended in this Budget. Still, the proportion of national income spent on education has gone up by one seventh. We are closer to but still below the OECD average.
Steeply raise poor children's relative incomes. Brown has increased tax credits for the working poor while raising out-of-work benefits. So work incentives rise as child poverty falls. A single mother with two young children will get 73 per cent more by way of out-of-work benefits than in 1997, while median incomes for the whole population have gone up 50 per cent and prices 22 per cent. The result is that some of the poorest families have had their real incomes grow more than 40 per cent, nearly twice as fast as the average household. This is in stunning contrast to the previous 18 years, when those on benefits were left progressively further behind by rising general prosperity.
Substantially raise poor pensioners' relative incomes. Their minimum income guarantee is up 30 per cent in real terms, a more modest increase than for children, but still ahead of average income rises. For the first time in 20 years, pensioners have a basic benefit, albeit means-tested, that at least keeps pace with earnings.
Gently squeeze the rich. Despite no rises in headline rates, income tax takes larger fractions of the incomes of the better- off. This is because tax thresholds and allowances have risen only with prices, but people are earning more in real terms. In this Budget, the Chancellor made a virtue of how tax credits paid directly to low- and middle-income families give them much more than spending the same money on raising the tax-free allowance. But for the better-off, not raising the threshold for paying higher-rate tax in line with earnings represents a straight loss.
Someone on £30,000 in 1997 was just below the higher-rate threshold. If that person's wages had risen in line with average income growth, he or she would now be on £45,000 a year - and paying £3,000 in higher-rate tax. This is the equivalent of raising the basic tax rate from 22p to 26p for higher earners.
The effect is dramatic. In 1988, Nigel Lawson cut the higher rate of tax from 60 to 40 per cent. Yet because his successors from both parties have adjusted thresholds in line with rising prices, not rising incomes, the rich now shoulder more of the tax bill than before the change. The highest-earning 10 per cent of taxpayers contribute more than half of all income tax, compared to under 40 per cent just before the Lawson tax cut.
So what are the big shortfalls in the Brown record - other than the still uncertain issue of whether his fiscal rules will eventually collapse like a house of cards?
First, while favoured groups among the poor have finally got a share in economic growth, less favoured groups fall ever further behind. The basic income support rate from next month is a mere £56 a week, only £7 more than in 1997, with this Budget's increase a shabby 55p. If you are not a pensioner and you have no children, it is assumed that your living requirements are the same as a generation ago.
Second, the non-means-tested basic state pension (as opposed to the minimum income guarantee) has continued to fall behind, rising by 31 per cent between 1997 and 2005, compared to the 50 per cent rise in average incomes. To avoid severe poverty, many pensioners have to claim through a means test. Because they find the whole idea humiliating, some don't do so.
The third shortfall again affects older people and deals them a double blow. This is the failure to fund local government properly. The double whammy for pensioners is that they are hit hard by rising council tax, and also affected by declining social services on which many rely.
This year's generous £200 council tax refund to pensioners helps a lot in the short term, but its recipients would prefer decent pensions and reasonable council taxes to having always to rely on Brown's ad hoc largesse. The arbitrary effect of the Chancellor's whims was well illustrated in this Budget. In December's pre-Budget report, Brown announced that the refund would be cut from £100 to £50. In the Budget itself, he announced it would go up to £200, and cheekily called this a £150 rise. The winter fuel allowance and council tax refund combined are now worth 10 per cent of a year's basic retirement pension, and the notional £150 increase in the refund in this Budget exceeds the £128 rise in the pension itself.
Research on older people's attitudes shows it isn't just hard cash that affects their sense of well-being. Avoiding the anxiety, complication and stigma of a means test; feeling valued through the payment of a decent, guaranteed basic pension; access to supportive and well-resourced local services - all of these things make a difference.
So if Brown embarks on another stint at No 11 on 6 May, what should be his next pledge? "A decent pension for everyone, without having to plead poverty," would do nicely.
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