Ed Balls and George Osborne attend the State Opening of Parliament on May 8, 2013. Photograph: Getty Images.
Show Hide image

Budget 2014: how Osborne can reduce Labour's poll lead on living standards

The Chancellor needs to make it clear how national policy on jobs, housing and taxes will improve voters' personal situations.

Two weeks ago, to mark the launch of their brand new party headquarters, the Conservatives held a closed door event with the last Tory leader to win a majority at a general election. Sir John Major was there to launch an apprenticeship scheme. He also addressed the packed room setting out a "moral mission" for the Conservative Party. He said:

"Education reform to make sure that people are being better educated in order to maximise their abilities, Opportunity, by creating jobs. And we should bear in mind that – when we are creating jobs and wish people to move around the country and take those jobs – they need houses to move to as well."

While George Osborne wasn’t actually present at the event, it seems from what we have heard over the weekend that the Chancellor was paying close attention to Major’s words of advice. Speaking to Andrew Marr on Sunday morning, Osborne confirmed that his focus this week was on creating the optimal conditions for private sector led job creation and building more homes (by extending the Help to Buy scheme and building the first new garden city for 100 years in Ebbsfleet). He also dismissed calls for a rise in the 40p tax rate, saying that the government’s focus was raising the personal allowance for people on the lowest incomes (he was at pains to reiterate the fact that anyone earning up to £100,000 would benefit from an increase in the personal allowance).

Whatever people say about the Chancellor, there is no doubt that he is sticking to his guns. Slowly but surely the economy is starting to pick up. The question for Osborne is whether he can link his political and policy priorities to a subsequent rise in living standards. Broad based arguments about the creation of 1million new jobs, reducing the deficit, building 15,000 new homes simply won’t cut it. If the Conservatives want to be seen as the party that stands up for hard working people (to coin a phrase) then they must personalise their commitments making a clear link between national economic policy and the impact any policies will have on the cost of living. Here are just a few suggestions:

Jobs
It’s not simply the creation of jobs that is key to economic growth. The importance of productivity is often under-reported. As Policy Exchange revealed last week, the flexibility of the UK’s labour market has put us in a much better position to weather the effects of the recession. However, real wages have fallen as output per worker has decreased. The decline in wages has, by in large, been in line with falling productivity. Therefore as the jobs market picks up and productivity increases, wages will again begin to rise.

The problem for Osborne is that people do not automatically link an increase in jobs to a rise in their wages. Were the Chancellor able to make that connection – perhaps by setting out plans to make it easier for businesses to hire more staff by increasing the National Insurance threshold – then I would expect to see the Conservatives close the gap on Labour’s poll lead on "living standards".

Housing
Ebbsfleet should be the start of a new wave of beautifully designed, privately funded and locally popular garden cities. As Daniel Knowles observed in his excellent article in the Times: "Ebbsfleet will at best provide 20,000 new homes when it is finished. That is about what London needs very six months with demand."

The housing debate has so far been a numbers game. The statistics are indeed important with some experts suggesting 100,000 new homes being the equivalent to 1 per cent of GDP. However, talking about hard numbers de-personalises the issue. It also strikes fear into communities who wonder if the state will all of a sudden impose an ugly great development on the edge of their beautiful village. It’s therefore important for the Chancellor to set out the emotional and social benefits of building beautiful new houses. Well-designed new garden cities, built near existing towns and cities could offer affordable, family sized homes to younger generations.

They could also offer older people the chance to live in closer proximity to their families. Show me a grandparent who doesn’t want to live closer to their grandchildren. At the moment sky high property prices and a lack of supply have led to younger people having to move hundreds of miles from their roots and family members in search of a job and a place with plenty of decent transport links and amenities such as restaurants and bars. Garden cities and housebuilding in general could be a real economic and social "game changer" but the language need to be less divisive (Nimbys v first time buyers) and more focused on keeping families together.

Taxes
A great deal has been made of Osborne’s reluctance to increase the 40p tax threshold. The number of people paying the higher rate of income tax has risen steadily from just over 1.7 million in 1993/4 to 4.4 million and is expected to increase to over 5 million next year. That is a staggering one in six of taxpayers, up from one in 20 when Nigel Lawson was Chancellor. However, the people who have suffered the most from the recession are not those earning £40,000 a year. The people who have been hit the hardest are those in what economists term the 40th percentile – earning around £18,000 a year. So it is right that the Chancellor looks to prioritise raising the personal allowance over a change to the 40p rate.

That said, if he was going to look at altering the higher rate bands, the most interesting idea I have seen to date is from the campaign group Renewal. They suggest abolishing the 40p band and moving the higher rate threshold to around £62,000. They estimate that about 2 million people would benefit from this tax cut. Combined with a rise in the personal allowance, Osborne could actually take Renewal’s idea and make the case that during the course of the coalition, the government has actually given 97 per cent of the country a tax cut. A pretty strong electoral message.

Reducing unemployment, increasing the supply of housing and boosting the pay packets of people on low and middle incomes are all policies that will help drive economic growth. The Chancellor is sometimes dismissed as a political tactician lacking a real strategic direction. I think this is a lazy assumption. He has surrounded himself with some of the brightest advisors and has a clear understanding of what is needed to both drive economic growth and increase living standards. The trick is to continue doing what he’s doing but to ensure that he continually links the two. 

Nick Faith is Director of Communications at Policy Exchange

Nick Faith is Director of Communications at Policy Exchange

Photo: Getty Images
Show Hide image

There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR