Budgets that look good on the day generally come apart by the weekend. Yesterday’s speech from the Chancellor was technically a spending statement but the same rule applies. However, the positive impact of George Osborne’s biggest ever U-turn may last a little longer.
The tax credit reductions that could have left the poorest families in the country up to £1,300 a year worse off from next April will not now happen. And the first thing to say is that this is undeniably a good thing. Hundreds of thousands of families in Britain will be sleeping just a little easier this weekend.
Of course, the tax credit cuts will go through eventually when they are abolished as part of universal credit by 2018. And new benefits claimants won’t get them at all. As the Labour chairman of the work and pensions committee, Frank Field, pointed out, this could still leave some future working families £2,000 worse off.
But the savage, cliff-edge income reductions that had been looming over Scottish families are, thankfully, scrapped. This has left a lingering sense of puzzled anti-climax for opposition politicians who will have to rethink their approach to what looked likely, until yesterday, to be the touchstone issue of the 2016 Holyrood elections.
What now for Kezia Dugdale’s call for the Scottish Government to reverse cuts to Air Passenger Duty and increase taxes on middle earners? Presumably these are no longer needed; unless Labour’s policy is to compensate claimants for any losses under universal credit, assuming that actually happens. It’s complicated.
Either way, it looks as if Nicola Sturgeon was correct to respond to the Scottish Labour leader’s tax initiative with supreme caution. She said it wasn’t yet certain that the tax credit cuts would happen, and she was right. It has left Kezia Dugdale with a spent firework in her hand. John Swinney can breathe easier too, for now. He doesn’t have to find cash to compensate for the tax-credit taper losses.
But where does it leave the Chancellor George Osborne? He acquired a bit of a reputation for U-turns back in 2012 with his “ominishambles” Budget. Remember the infamous pasty tax? This looks like the mother of all pasty taxes.
Was the U-turn forced upon the Chancellor by the revolt of the House of Lords? Or had he been playing with our social social consciences all along? Was this taper cut an exercise in expectation management, and had he always intended to drop it to show a bit of compassionate Conservatism?
It was probably a little of both. Clearly, the Tories had a massive political problem on their hands trying to push through these cuts at the very moment they were claiming to the be “the party of the workers”. It made a nonsense of all the protestations about making work pay.
Here were real hard working families, real “strivers”, doing their best to keep off benefits, and yet they were being hammered by an effective marginal tax rate of 80 per cent. It was simply morally and politically indefensible. Even the London Mayor, Boris Johnson, was opposed. The House of Lords rightly threw it out in disgust.
So, why did the Tories propose the tax credit cuts in the first place? Didn’t Mr Osborne tell us only in his Budget speech that tax credits costs were “unsustainable” and the cuts were “essential” if Britain was to get the deficit under control?
Indeed, he railed at the Lords for their “unconstitutional” rejection of the measure and David Cameron suggested he would have to review the very powers of the unelected Lords. It seems they were doing exactly what a revising chamber should do: saving a government from itself.
Then there was the mending of the roof. Mr Osborne insisted that hard choices had to be made and he needed this £4.4 billion to fix the roof to protect the economy from the next banking crash. Clearly it wasn’t as badly in need of repair as he suggested. Or perhaps, like Gordon Brown, the Chancellor thinks he has “abolished boom and bust”.
The official reason for the reversal is that the nation’s finances are improving more rapidly than expected. The Office of Budget Responsibility came to the Chancellor’s rescue by increasing its forecasts of how much tax revenue will be coming in over the next three years. It also said it had underestimated VAT revenues.
But this trickle of extra cash seems to have turned into a veritable torrent. Not only has Mr Osborne scrapped the tax credit cuts, he has also dropped the forecast cuts to policing in England and Wales, found more for housing subsidies to first-time buyers and promised above-inflation increases for the NHS until 2020.
The spending announcements went on and on. Education spending protected in England and Wales; another £6bn for defence; more for social care; something for mental health. With an eye for the headlines, he even promised to divert VAT on women’s sanitary products to women’s health charities. It was all too much; like Chancellor tourettes.
Of course it was largely about wrong-footing Labour. John McDonnell, the new Labour shadow chancellor, had a much more difficult time than his predecessor, Ed Balls, responding to this spending statement. The tax credit fox was well and truly shot. He was left initially taking the Chancellor to task for failing to balance the budget this year, even though Labour policy is to end austerity and increase spending.
The Left-wing shadow chancellor then astonished his MPs by producing a copy of Chairman Mao’s Little Red Book and quoting from it. Tory MPs couldn’t believe their luck. “It’s his own personal signed copy”, quipped Mr Osborne.
Mr McDonnell intended this as a clever way of pointing out that the Government was busy selling off state assets to the Chinese sovereign wealth fund. But it was an inept stunt that will only provide a clip for every Tory election broadcast from here to 2020.
Joking aside, there remains a puzzle about Mr Osborne’s tax credit U-turn. Why didn’t he see it coming? Or did he? A lingering suspicion remains that, just perhaps, these swingeing taper cuts were always expendable and a diversion from the coming universal credit changes. But if it was a political ploy then it was a cynical and disgraceful one. It created unnecessary psychological distress to many families.
Budget stunts always come apart and this one could leave the Chancellor with rather more collateral damage to his reputation than any pasty tax. After the dust has settled and the red book numbers are crunched, this Chancellor will be taken severely to task for indulging in creative accounting on an epic scale.
For what is clear, despite all the giveaways, is that the Conservatives are planning the most severe retrenchment in public spending by any government since the Second World War. Spending as a share of GDP is forecast to fall to 36 per cent, down from more than 50 per cent at the turn of the century. It will be a threadbare Britain that’s left after Mr Osborne has had his last laugh.