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
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The Republican nightmare shows no sign of ending

The Republican establishment is no closer to identifying the candidate who can stop Trump or Cruz, while Hilary Clinton finds herself in a similar position to Barack Obama eight years ago.

After being cruelly denied by the people of Iowa, we were finally treated to a Donald Trump victory speech in New Hampshire last night. While Trump’s win will come as a “yuge” shock to anyone waking up from a yearlong nap, it was very much in line with more recent expectations. More surprising is John Kasich’s second place finish ahead of the tightly packed trio of Ted Cruz, Jeb Bush and Marco Rubio.

Rubio’s underperforming his polling average by about four points at time of writing (with 89 per cent of precincts reporting) – perhaps partly the natural erosion of his post-Iowa bump, perhaps also due to his mauling at the hands of Chris Christie in Saturday night’s debate. Meanwhile Ted Cruz’s 12 per cent compares favourably with past Iowa winners’ New Hampshire performances: Mike Huckabee got 11 per cent in 2008 and Rick Santorum 9 per cent in 2012, but neither came close to winning the nomination.

The result offers little help to those “establishment” Republicans who’d been planning to coalesce around whichever of Jeb Bush, Chris Christie, John Kasich and Marco Rubio emerged from New Hampshire in the best position.

Christie and Carly Fiorina are probably done. Both got less than 2 per cent in Iowa; both finished in single digits in New Hampshire after focusing heavily on the state; both are stuck at the bottom of the national polls, and neither has raised all that much money (relatively speaking). Christie is heading back to New Jersey to “take a deep breath”, “get a change of clothes” and “make a decision” tomorrow.

But who will party elites rally around to stop Trump and Cruz? Kasich, who came second in New Hampshire but is on just 3 per cent nationally? Rubio, who beat expectations in Iowa and is best of the bunch in national polls but disappointed badly tonight after a terrible debate performance? Or Bush, who’s had more than $75 million spent on him by the “Right to Rise” super PAC with just three per cent in Iowa and 11 per cent in New Hampshire to show for it? Nobody has won either party’s nomination in the modern primary era without a top-two finish in New Hampshire – does either Rubio or Bush really seem like the candidate to break that trend?

Jeb does have plenty of money and organisation, and is guaranteed some extra support from one prominent establishment Republican in South Carolina: his brother. George W has recorded an ad for the Jeb-supporting “Right to Rise” PAC, calling his brother “a leader who will keep our country safe”, which is already running on South Carolina TV (and which ran in New Hampshire during the Super Bowl). He will also join his brother on the campaign trail in the run up to the primary. Bush 43 left office very unpopular and remains the most disliked former President, but he is very popular with Republicans. A Bloomberg/Selzer poll in November found that 77 per cent of them have a favourable opinion of him, making him far more popular than any of this year’s candidates. (Jeb calls his brother “the most popular Republican alive”, which is a bit of a stretch. Nancy Reagan? Clint Eastwood?)

Trump leads convincingly from Cruz in the most recent polls in both South Carolina and Nevada, but there haven’t been any polls from either state since the Iowa caucus. Neither state is as friendly territory for “establishment” candidates as New Hampshire: South Carolina’s electorate is much more evangelical, and Nevada’s much more conservative. Newt Gingrich won South Carolina handily in 2012 and Huckabee came a close second in 2008. Cruz and Trump are doing best with evangelicals and very conservative voters this time around. Thanks to the state’s winner-take-all rules, whoever prevails in South Carolina will get the small ego boost of going into Super Tuesday with the most delegates.

On the Democratic side, Bernie Sanders secured a big win over Hillary Clinton (60 per cent to 38 per cent with 90 per cent of precincts reporting). What seemed incredibly unlikely a year ago has been almost certain for the past week or so. As he heads south and west, though, Sanders faces a new challenge: winning over African American voters.

Just two per cent of those who voted in the two Democratic contests so far have been black; in the next ones that number will be a lot higher. (In 2008, it was 15 per cent in Nevada and 55 per cent in South Carolina). In national polls, Clinton holds a 58-point lead among African American voters compared to her six-point lead with white voters, and she’s 31 points ahead overall in FiveThirtyEight’s average of South Carolina polls (all taken pre-Iowa).

Ironically, Clinton now finds herself in a similar position to the one Barack Obama was in when battling her for the nomination in 2008: heading to South Carolina, having won Iowa but lost New Hampshire, hoping African American voters will help her win big and regain the momentum as we head towards Super Tuesday.