The welfare debate is only just warming up

Making out that cutting working-age welfare won’t hurt those in work is so divorced from reality that there was always going to be backlash. None of which is to say that Osborne’s gamble won’t pay off.

Powerful Chancellors often over-reach politically before a fall, or at least a bump. For Gordon Brown, it was the desire to cut the basic rate of tax to 20p which brought with it the abolition of the 10p tax rate and the debacle that ensued. When it comes to George Osborne, the political itch that needs to be scratched is the desire to legitimise cutting support for those on low incomes – working and non-working families alike – through his favoured framing of supporting strivers and hurting scroungers.

Whether this agenda, and its associated parliamentary game-playing, will work to his advantage, or end with a bump, is not just the issue of the month it’s a theme that will run through 2013 all the way to the next election. Expect further ‘welfare savings’ reaching out beyond the Spending Review until 2020, dwarfing those announced in the Autumn Statement, to be announced in the second half of the Parliament (more likely by the Conservatives, than the Coalition) giving rise to an eye-watering grand total that will be the centre-piece of David Cameron’s election campaign. It will be coming to a billboard near you in the form of a poster about ‘Labour’s tax-bombshell’ arising from its need to pay for welfare.

Those rushing to declare how all this will play out with the electorate based on a few uncertain polls should pause: we have not yet reached the end of the beginning of this debate, with the Parliamentary vote on up-rating due in January. There isn’t a settled view among the public. There’s not a well developed awareness of the nature of the hardship that will arise from the scale of the cuts, the great bulk of which are still to come. Nor, conversely, can we gauge the consequences of the political resentment that will continue to swell as real wages fall through next year and into 2014.

But a few early conclusions can be drawn. One is the piercing of the hubristic view that a casual  deployment of the ‘strivers’ narrative is enough on its own to ensure an easy ride for further welfare cuts: there is political risk here for Osborne as well as opportunity. Another is that Labour will have to marry its current opposition, based on fairness, with a forensic fiscal analysis of how its measures could secure lower welfare bills in the future via higher employment. This means saying more about how they will deploy effective job-programmes (which given the successful legacy of the Future Jobs Fund should be possible); more about how their wider strategy for welfare and public services will enable higher employment; and more about how any up-front costs would be paid for. As future welfare cuts mount, and the scale of the impending tax-attack from the Conservatives grows, a fairness argument on its own will leave it highly exposed. A fiscal response is needed too.

In the meantime Labour is resting heavily on the fact that by ramping up the rhetorical stakes Osborne has succeeded in rumbling himself. Up until now the part of his strategy that the Chancellor is most anxious about – that cutting ‘welfare’ actually means hitting the working poor – received scant media attention. Now, for the first time, it’s considered news.   

The hope is that this new spirit of scrutiny results in a closer examination of what has actually been happening to in-work support. Take working tax credit. Osborne’s first budget in 2010 took the decision to freeze a large chunk of it. Next up was the cut in support for childcare going exclusively to working parents. Then in autumn 2011 came the decision to freeze the remaining aspects of working tax credit (at a time when inflation had spiked at 5%) followed in this year’s Budget by deep cuts in support for those working part-time (at a time of mass under-employment). It is an unnoticed irony that the Autumn Statement’s controversial decision to uprate working tax credit by a mere 1% actually represents a more generous offering from the Chancellor than his previous diet of cash freezes and policy cuts.

The Coalition’s retort is, of course, that a combination of increased personal tax allowances and, in time, the Universal Credit will improve the plight up the working poor. To assert that no one in work will be worse off once increased tax allowances are taken into account is manifest nonsense – to see why you only need to consider the example of the person earning less than the personal tax allowance and receiving tax credits. Indeed, on average the losses arising from the Autumn Statement due to cuts to benefits and tax credits outweigh the gains from the increased allowance across the entire bottom half of the income distribution (though bear in mind that hidden within these averages will be many working households who do gain overall: most obviously dual earning households without children).

As for the Universal Credit, it is in the unfortunate position of being over-hyped, under-planned and now eroded by cuts – all prior to implementation. Conceived out of the laudable desire to ensure that the low paid can keep more of their own money, it is actually going to result in increased numbers facing higher effective tax rates. Moreover, the Coalition’s two flagship ‘striver’ policies – personal tax allowance and universal credit - are set to collide in something of a Whitehall car-crash. Those receiving universal credit will lose two thirds of any gains arising from future increases in the personal allowance – gains that other, higher earning, tax payers will receive. As one policy gives, the other simultaneously takes.

The extent to which any of this really impacts on the politics of welfare cuts over the next year is, of course, another matter. The deadening language in which most of the debate is conducted - earnings disregards, uprating systems, and marginal deduction rates – is more likely to result in glazed eyes than raised voices. More visible, and combustible, for the Coalition is likely to be the impending cut to council tax benefit (again aimed at both the working poor and the out of work) which will show up in spring’s council tax bills.

Running down those on state support, whether in or out of work, and implying that they are somehow undeserving is nasty politics. And making out that cutting working-age welfare won’t hurt those in work is so divorced from reality that there was always going to be backlash. None of which is to say that Osborne’s gamble won’t pay off. It’s still all to play for. Either way, the heavy handed manner in which this political trap was set doesn’t reflect well. Over the longer term Chancellors fare best when they leave the political tricksiness to others.

Passengers travel on a London bus. Photo: Getty

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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What is the EU customs union and will Brexit make us leave?

International trade secretary Liam Fox's job makes more sense if we leave the customs union. 

Brexiteers and Remoaners alike have spent the winter months talking of leaving the "customs union", and how this should be weighed up against the benefits of controlling immigration. But what does it actually mean, and how is it different from the EU single market?

Imagine a medieval town, with a busy marketplace where traders are buying and selling wares. Now imagine that the town is also protected by a city wall, with guards ready to slap charges on any outside traders who want to come in. That's how the customs union works.  

In essence, a customs union is an agreement between countries not to impose tariffs on imports from within the club, and at the same time impose common tariffs on goods coming in from outsiders. In other words, the countries decide to trade collectively with each other, and bargain collectively with everyone else. 

The EU isn't the only customs union, or even the first in Europe. In the 19th century, German-speaking states organised the Zollverein, or German Customs Union, which in turn paved the way for the unification of Germany. Other customs unions today include the Eurasian Economic Union of central Asian states and Russia. The EU also has a customs union with Turkey.

What is special about the EU customs union is the level of co-operation, with member states sharing commercial policies, and the size. So how would leaving it affect the UK post-Brexit?

The EU customs union in practice

The EU, acting on behalf of the UK and other member states, has negotiated trade deals with countries around the world which take years to complete. The EU is still mired in talks to try to pull off the controversial Transatlantic Trade and Investment Partnership (TTIP) with the US, and a similar EU-Japan trade deal. These two deals alone would cover a third of all EU trade.

The point of these deals is to make it easier for the EU's exporters to sell abroad, keep imports relatively cheap and at the same time protect the member states' own businesses and consumers as much as possible. 

The rules of the customs union require member states to let the EU negotiate on their behalf, rather than trying to cut their own deals. In theory, if the UK walks away from the customs union, we walk away from all these trade deals, but we also get a chance to strike our own. 

What are the UK's options?

The UK could perhaps come to an agreement with the EU where it continues to remain inside the customs union. But some analysts believe that door has already shut. 

One of Theresa May’s first acts as Prime Minister was to appoint Liam Fox, the Brexiteer, as the secretary of state for international trade. Why would she appoint him, so the logic goes, if there were no international trade deals to talk about? And Fox can only do this if the UK is outside the customs union. 

(Conversely, former Lib Dem leader Nick Clegg argues May will realise the customs union is too valuable and Fox will be gone within two years).

Fox has himself said the UK should leave the customs union but later seemed to backtrack, saying it is "important to have continuity in trade".

If the UK does leave the customs union, it will have the freedom to negotiate, but will it fare better or worse than the EU bloc?

On the one hand, the UK, as a single voice, can make speedy decisions, whereas the EU has a lengthy consultative process (the Belgian region of Wallonia recently blocked the entire EU-Canada trade deal). Incoming US President Donald Trump has already said he will try to come to a deal quickly

On the other, the UK economy is far smaller, and trade negotiators may discover they have far less leverage acting alone. 

Unintended consequences

There is also the question of the UK’s membership of the World Trade Organisation, which is currently governed by its membership of the customs union. According to the Institute for Government: “Many countries will want to be clear about the UK’s membership of the WTO before they open negotiations.”

And then there is the question of policing trade outside of the customs union. For example, if it was significantly cheaper to import goods from China into Ireland, a customs union member, than Northern Ireland, a smuggling network might emerge.

 

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.