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29 September 2014

Osborne sets a new welfare trap for Labour with unprecedented squeeze on the poor

The planned £3bn cut in benefits is designed to force Labour to say which taxes it would raise or which cuts it would make. 

By George Eaton

No speech or financial statement by George Osborne passes without him taking the chance to sharpen the dividing line between his party and Labour on welfare. This afternoon’s address to the Conservative conference, perhaps his last as Chancellor, did not break the trend. In one of two announcements not pre-briefed, he pledged to freeze all working-age benefits (the retired and the disabled will be spared) for two years from April 2016 if the Tories win the next election. 

The move marks the culmination of Osborne’s progressively tougher approach to welfare. He began by shifting the indexation of benefits from RPI to CPI (which rises at a slower rate) in 2010, then he capped benefit increases at 1 per cent from 2013, now he has pledged to freeze payments altogether, an unprecedented act of austerity and a baleful prospect for the working and non-working poor (most of whom are now in the former group). The policy was justified on the basis that since 2007, earnings had risen by 14 per cent, while working age benefits had been uprated by 22.4 per cent. This may appear to be an argument for boosting pay, rather than cutting welfare, but Osborne is pursuing an undisguised race to the bottom. “The fairest way to reduce welfare bills is to make sure that benefits are not rising faster than the wages of the taxpayers who are paying for them,” he declared. By 2017, after a two-year benefit freeze, it is forecast that the gap between earnings and benefits will have been reduced to zero. Osborne’s hope is that those bearing the brunt of the longest fall in living standards since the 1870s will be consoled by the fact that their neighbour, at least, is worse off too. 

His other political aim is to force Labour to say what “tough choices” it would make. In a pre-emptive act of austerity, Ed Balls announced in his speech last week that child benefit increases would be capped at 1 per cent for the first two years of a Labour government. But this move would save just £400m. Osborne’s new squeeze on welfare will save £1.6bn in 2016-17, rising to £3.2bn a year by 2017-18. In the post-speech briefing to journalists, his spokesman made it clear that the move is intended to force Labour to say which taxes it would raise, or which cuts it would make, to bridge the gap. But in a reminder of the parlous state of the public finances (how Osborne must wish that the deficit was shrinking as fast as his waistline), even after four years of austerity, he also conceded that the new welfare measures leave nearly £9bn of the reductions promised by the Chancellor unaccounted for. 

The other new announcement in the speech was a promise of action against multinational corporations that use Machiavellian wheezes to shield their profits from UK taxation. After the squeeze on the poor, the measure is designed to frame Osborne as a “tough” but “fair” figure, determined to honour the mantra that “we’re all in this together”. He said: “So while we offer some of the lowest business taxes in the world, we expect those taxes to be paid – not avoided. Some technology companies go to extraordinary lengths to pay little or no tax here. If you abuse our tax system, you abuse the trust of the British people. And my message to those companies is clear: We will put a stop to it. Low taxes, but low taxes that are paid.”

The policy was quickly christened the “Google Tax”, in tribute to that company’s notoriously aggressive avoidance, a label that Osborne’s adviser was happy to embrace at the briefing, before mischievously adding: “It wouldn’t be for us to name individual companies.” 

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But while the Chancellor’s team present his raid on welfare claimants and on tax-shy corporations as emblematic of a balanced approach, it is clearer than ever that the burden of austerity will fall on the poor in the next parliament. “I tell you in all candour,” he said (a conscious echo by the history graduate of Jim Callaghan’s 1976 repudiation of Keynesianism), “that the option of taxing your way out of a deficit no longer exists, if it ever did.” How this squares with the 24 tax rises imposed by Osborne in this parliament is unclear. But by coming close to ruling out any new tax increases after 2015, he is guaranteeing that many of those most able to contribute more to the national effort of deficit reduction will no longer be required to do so. 

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