We need a Budget that tackles the living standards crisis. This won't be it

Help for first-time buyers and childcare tax relief ignore Britain's fundamental supply side problems.

Though it may seem hard to remember a time before 'the crisis of living standards' tripped off the tongues of politicians and wonks, in truth it really only entered the economic lexicon after the crash. Economic forecasters believe the toxic cocktail of stagnating wages in the middle and lower part of the wage distribution since 2003; the lack of availability of cheap credit to boost incomes since the financial crisis in 2008; and increasing prices of big-ticket items like housing, transport and energy bills is not going away any time soon. The squeeze that families are experiencing in trying to make ends meet is one of the key issues that politicians from left and right have to grapple with. It doesn’t seem unreasonable to ask, therefore, what the Chancellor’s Budget tomorrow – the big economic set-piece policy event of the year – is going to do about it.

The Budget needs to meet both a short-term and a long-term living standards test. In the short-term, there’s not much available to the Chancellor save using the tax and benefit system to do what he can to ease the burden on families. It’s these short-term levers that all of the pre-Budget speculation has focused on: wealth taxes, childcare subsidies, accelerating planned increases in the personal allowance, and delaying the rise in fuel duty. Osborne’s problem though is that his hands are tied because he has indicated he won’t be budging from his Plan A: reducing public spending and increasing taxes as a way of trying to close the deficit – when from a macroeconomic perspective, he would be better off filling this gap by using demand-side policies to boost family incomes that would also ease the living standards squeeze, and by investing in infrastructure that could also immediately help to create jobs and demand at the same time as delivering long-term returns.

So the expected announcements on childcare tax breaks and fuel duty, even taking into account the increases in the personal allowance already announced, are very unlikely to outweigh the hit that families – particularly families with children – have taken since 2010 – cuts to child tax credits, working tax credits, other working and non-working benefits and child benefit. The majority of families will most likely be worse off as a result of overall changes to the tax and benefit system since the general election: a net negative effect on living standards.

A mansion tax – the most radical tax proposal on the table from both Labour and the Lib Dems – could be of huge symbolic significance: a sign that we are all genuinely in it together, and that it is not just for families of moderate means to bear the burden of spending cuts. Yet a tax of 1% on homes worth over £2m would only raise a modest £1.7bn, less than half of what it would cost to reduce the basic rate by 1p by the Treasury’s own calculations.

These sorts of figures show the issue with focusing on the tax-benefit system as more than a short-term solution to the living standards issue. Even pretty substantial changes to the tax-benefit system can only go so far to address the impacts of some of the long-term economic trends that sit at the heart of the living standard crisis. Wage inequality has grown over the past thirty years: if current trends continue, the High Pay Commission has predicted that by 2035 the top 1% of earners will take home 14% of national income, a ratio last seen in Victorian England. Wealth inequality and the cost of housing has increased, fuelled by a housing price bubble: for the first time in recent history, the majority of under 35s on low to middle incomes live in private rented property. Transport and energy bills are forecast to continue to rise, even though some of these companies’ profits seem to be healthier than ever.

In reality, using the tax-benefit system to fix growing inequality in living standards in the long term is not going to cut it – growing wage and wealth inequality cannot be fixed with ever-greater redistribution. Moreover, there is a renewed recognition, particularly on the centre-left, in the idea of the dignity of labour: that it is fundamentally wrong that people are not able to earn enough to support their families through working full-time, a situation many in minimum-wage jobs find themselves in.

What does that mean for tomorrow’s Budget? If it were really going to grapple with some of these long-term issues of predistribution, it would explicitly be trying to shift policy towards trying to boost real wages in the bottom half of the wage distribution and bringing down the costs of housing, childcare and energy.

There are two key problems with this approach. The first is that no politician – or indeed, economist – really has the answer on how to change the shape of the wage distribution. It probably needs to be some sort of mix of industrial policy, skills policy and policies to empower employees to demand a better deal in the workplace. Yet there is a big elephant in the room: our low skill, low-pay service sector that has grown as a result of the increase in the number of high-skill jobs that have been created in recent decades. The UK can be characterised as a relatively high wage inequality country with a moderately sized redistributive state.  There are other models around the world – Sweden, which has relatively high wage inequality but a larger redistributive state funded through higher progressive taxation, which makes possible the provision of universal free childcare; or Japan, which has low wage inequality and a relatively small state. We can look to Sweden or Japan as exemplars but the reality of trying to transition to a different model is there is no clear policy path to follow. It is much harder to predict the impact of a particular industrial policy on living standards than it is changes to the tax and benefit system.

The second is that while there are much clearer proposals for what to do on big-ticket spending items like housing, childcare, energy and transport, the solutions are radical for a Conservative Chancellor. For example, on housing, building more houses has to be a core part of the solution. On childcare, it would be more efficient to concentrate on expanding the supply of free childcare places. Yet in both of these areas, George Osborne will be announcing demand-side reforms, through help for first-time buyers and childcare tax relief. Neither address the fundamental supply side issues.

Unfortunately for Britain’s families this means the Budget tomorrow is likely to fail on both a short-term and long-term test.

The Treasury. Photograph: Getty Images

Sonia Sodha is head of policy and strategy at the Social Research Unit and a former senior policy adviser to Ed Miliband. She tweets @soniasodha.

Photo: Getty Images
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Why are boundary changes bad for Labour?

New boundaries, a smaller House of Commons and the shift to individual electoral registration all tilt the electoral battlefield further towards the Conservatives. Why?

The government has confirmed it will push ahead with plans to reduce the House of Commons to 600 seats from 650.  Why is that such bad news for the Labour Party? 

The damage is twofold. The switch to individual electoral registration will hurt Labour more than its rivals. . Constituency boundaries in Britain are drawn on registered electors, not by population - the average seat has around 70,000 voters but a population of 90,000, although there are significant variations within that. On the whole, at present, Labour MPs tend to have seats with fewer voters than their Conservative counterparts. These changes were halted by the Liberal Democrats in the coalition years but are now back on course.

The new, 600-member constituencies will all but eliminate those variations on mainland Britain, although the Isle of Wight, and the Scottish island constituencies will remain special cases. The net effect will be to reduce the number of Labour seats - and to make the remaining seats more marginal. (Of the 50 seats that would have been eradicated had the 2013 review taken place, 35 were held by Labour, including deputy leader Tom Watson's seat of West Bromwich East.)

Why will Labour seats become more marginal? For the most part, as seats expand, they will take on increasing numbers of suburban and rural voters, who tend to vote Conservative. The city of Leicester is a good example: currently the city sends three Labour MPs to Westminster, each with large majorities. Under boundary changes, all three could become more marginal as they take on more wards from the surrounding county. Liz Kendall's Leicester West seat is likely to have a particularly large influx of Tory voters, turning the seat - a Labour stronghold since 1945 - into a marginal. 

The pattern is fairly consistent throughout the United Kingdom - Labour safe seats either vanishing or becoming marginal or even Tory seats. On Merseyside, three seats - Frank Field's Birkenhead, a Labour seat since 1950, and two marginal Labour held seats, Wirral South and Wirral West - will become two: a safe Labour seat, and a safe Conservative seat on the Wirral. Lillian Greenwood, the Shadow Transport Secretary, would see her Nottingham seat take more of the Nottinghamshire countryside, becoming a Conservative-held marginal. 

The traffic - at least in the 2013 review - was not entirely one-way. Jane Ellison, the Tory MP for Battersea, would find herself fighting a seat with a notional Labour majority of just under 3,000, as opposed to her current majority of close to 8,000. 

But the net effect of the boundary review and the shrinking of the size of the House of Commons would be to the advantage of the Conservatives. If the 2015 election had been held using the 2013 boundaries, the Tories would have a majority of 22 – and Labour would have just 216 seats against 232 now.

It may be, however, that Labour dodges a bullet – because while the boundary changes would have given the Conservatives a bigger majority, they would have significantly fewer MPs – down to 311 from 330, a loss of 19 members of Parliament. Although the whips are attempting to steady the nerves of backbenchers about the potential loss of their seats, that the number of Conservative MPs who face involuntary retirement due to boundary changes is bigger than the party’s parliamentary majority may force a U-Turn.

That said, Labour’s relatively weak electoral showing may calm jittery Tory MPs. Two months into Ed Miliband’s leadership, Labour averaged 39 per cent in the polls. They got 31 per cent of the vote in 2015. Two months into Tony Blair’s leadership, Labour were on 53 per cent of the vote. They got 43 per cent of the vote. A month and a half into Jeremy Corbyn’s leadership, Labour is on 31 per cent of the vote.  A Blair-style drop of ten points would see the Tories net 388 seats under the new boundaries, with Labour on 131. A smaller Miliband-style drop would give the Conservatives 364, and leave Labour with 153 MPs.  

On Labour’s current trajectory, Tory MPs who lose out due to boundary changes may feel comfortable in their chances of picking up a seat elsewhere. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.