A country where people are paid more, the Government takes less of their money and we therefore have to spend less on welfare
After each Budget, I do a blog summarising the latest data about how our economy is doing and the Chancellor’s key announcements.
How is our economy doing?
The independent Office for Budget Responsibility predicts that our economy will grow by 2.4% in 2015. Although that’s slightly lower than they forecast in March, it’s faster than the American or German economies are predicted to grow. Indeed, for the second year in a row, Britain is expected to have the strongest economic growth of any major advanced economy.
Thanks to this growth, employment is predicted to continue rising.
And the deficit is predicted to fall to £69.5 billion this year, less than half the £153.5 billion we inherited in 2010.
In other words, we’ve turned the corner - our economy is growing, more people are in work and the deficit is falling - but the Government is still borrowing too much because it’s still spending too much.
Some on the left want an end to austerity. They seem to think that the Government can go spending money it doesn’t have. Whilst I understand their concern about the impact of cuts, you only have to look at what’s happening in Greece to see that if you put these decisions off you end up having to make much more damaging cuts in the end. We need to get back into the black.
Getting Britain back in the black
To eliminate the deficit and start running a surplus (which is what governments should do when times are good - Labour’s key mistake was to run a deficit in the boom before the banking crisis, which meant that when the economy went into a deep recession we ended up with a record deficit; if they'd been running a surplus beforehand, we wouldn’t be having to make painful decisions now), the Government needs to cut spending and/or increase tax receipts by a further £37 billion over this Parliament.
Some people had predicted that to achieve this the Government would have to cut deeper than it did in the last Parliament. The first piece of good news the Chancellor announced yesterday was that because tax receipts have been higher than predicted and because the Government is raising money by selling off the banks we had to bail out, he can get this country back into the black by 2019-20 whilst cutting no faster than he did in the last Parliament.
The key political choice is where to find this £37 billion. At the Election, we set out two key differences between how we would do this and Labour’s approach. First, we would not increase taxes like income tax, national insurance or VAT. And second, we would save £12 billion from the welfare budget, meaning we would have to make smaller cuts to public services.
Today, the Chancellor kept both of those promises and set out in detail how he will save £12 billion from the welfare budget as well as raising £5 billion from tackling tax evasion and avoidance (the remaining £20 billion will come from departmental spending and will be identified via a Spending Review this autumn).
Tackling aggressive tax avoidance and evasion.
The Chancellor announced a number of measures to tackle aggressive tax avoidance and evasion, which taken together are predicted to raise an extra £5 billion a year. In particular, the Government will provide HMRC with an extra £750 million to go after tax fraud and end the abuse of non-domicile tax status.
This is a crucial part of the Budget package. As Conservatives, we believe in low taxes, but we are equally passionate about ensuring that people and businesses pay their fair share.
Moving to a high wage, low tax, low welfare economy
When we came to power in 2010 we inherited a low wage, high tax, high welfare economy. The UK has 1% of the world’s population, it generates 4% of the world’s income but it is responsible for 7% of the world’s welfare spending. As Conservatives, we want to move to a country where people are paid more, the Government takes less of their money and we therefore have to spend less on welfare.
Low welfare. Much of the welfare budget goes to the elderly and the disabled. The Chancellor made it clear that he won’t be cutting that. The state pension will continue to be increased in line with prices, wages or 2.5% whichever is higher, other pensioner benefits will be protected and he will not be cutting, taxing or means testing disability benefits.
But some of the welfare budget goes to people who are unemployed and some of it goes to people who are in work but relatively lowly paid and therefore need help in the form of housing benefit and/or tax credits. In 1980, working age welfare accounted for 8% of government spending; today it accounts for 13%. It is this that we want to reduce. The Chancellor announced a whole series of changes but here are some of the key ones:
- people aged 18 to 21 will have to work or be in education, not on out-of-work benefits and, with the exception of vulnerable young people, they will lose their entitlement to housing benefit. 18 year olds who get a job can rarely afford their own place - why should those who aren’t working be able to?
- working age benefits, including tax credits, will be frozen for four years;
- the level of earnings at which a family’s tax credits and universal credit start to be withdrawn will be reduced and the rate at which tax credits are withdrawn will be increased so that help is focused on those most in need;
- families who have a third or subsequent child after April 2017 will not receive additional tax credit or universal credit. Support for families who make a new claim to universal credit after this date will also be limited to two children and we will make similar changes to housing benefit;
- support for mortgage interest payments will be turned from a benefit into a loan;
- rents in social housing will be reduced by 1% a year for four years. This will help to control the housing benefit bill, but it’s also good news for most council and housing association tenants;
- those families living in social housing with incomes of over £40,000 a year in London and over £30,000 a year elsewhere will have to pay a market rent rather than a subsidised one; and
- the cap on the total amount of benefits an out of work family can receive - introduced by the Coalition Government after some families were receiving more than £50,000 a year under Labour - will be reduced from £26,000 to £23,000 in London and £20,000 elsewhere (I’m glad the Chancellor has listened to the argument for a higher cap in London given housing costs are higher here).
Low taxes. Rather than take money from people in tax and then give it back in tax credits, the simplest way to help working people is to let them keep more of the money they work hard to earn.
At the Election, we promised to increase the personal allowance - the amount of money you can earn before you start paying income tax - to £12,500 and the threshold at which people start paying the 40p rate to £50,000. Yesterday, the Chancellor made a start on delivering both of those promises, raising the personal allowance to £11,000 and the 40p threshold to £43,000. As a result, 29 million people will pay less in income tax.
High pay. As Alistair Darling has argued, tax credits are “subsidising lower wages in a way that was never intended”. Employers can get away with paying their staff less than they need to live on because they know the Government will top those salaries up. That can’t be right.
People who work hard in low paid jobs deserve a pay rise and that’s what they’re going to get. The Chancellor announced that he is introducing a new compulsory National Living Wage for everyone aged 25 and over. It will start next April at £7.20 an hour - a significant increase on the current minimum wage - and it will increase to £9 an hour by 2020.
I’m absolutely delighted by this announcement. It’s something I’ve long campaigned for. Two and a half million people will benefit with those on the minimum wage seeing their pay rise by a third or over £5,000 a year over this Parliament.
And to ensure businesses can afford to pay low-paid staff more, the Chancellor is cutting corporation tax to 19% in 2017 and to 18% by 2020. This won’t only help existing business in the UK, it sends out a message around the world that this country is a great place to base your business. He’s also increasing the Employment Allowance - which reduces the National Insurance Contributions businesses have to pay - to £3,000 in 2016.
Other Budget measures
3 million more apprenticeships Another way of raising pay is improve our productivity. Key to this is having a more highly-skilled workforce. It is to our national shame that we are almost the only advanced country in the world where the skills of our 16-24 year olds are no better than our 55-64 year-olds. Our education reforms in the last Parliament have begun to address the problem and we’re going further in this Parliament by tackling schools that are coasting, but there’s also a role for employers to play. Many firms do a brilliant job training their employees, but too many large companies leave it to others. The Chancellor is therefore introducing an apprenticeship levy on all large firms to help fund 3 million more apprenticeships.
More money for the NHS. Most government departments will see reductions in their budgets, but there are two that are seeing increases. One is our precious NHS. At the Election, we promised to provide an additional £8 billion by 2020 over and above the rate of inflation - a pledge Labour refused to match - and yesterday the Chancellor confirmed that we would do just that.
And more money for defence. And the second is our armed forces. The Chancellor announced that the defence budget will increase in real terms every year and that we will meet the NATO pledge to spend 2% of our national income on defence right the way through until 2020.
1% annual pay rises in the public sector. The Chancellor acknowledged that “there has already been a period of restraint” in public sector pay. That's an understatement - many public sector workers have seen their salaries increase by less than the rate of inflation over the last few years and had to increase their pension contributions at the same time. But he was right to point out that at a time when budgets are tight more generous pay awards would mean more job losses in the public sector. Nonetheless the news that public sector pay will increase by 1% a year for the next four years will be one of the least popular elements of the Budget.
A fairer deal for motorists. In the last 25 years, France has built more than 2,500 miles of motorway; we’ve built just 300. In the last Parliament, we increased spending on our roads network, but we need a long-term solution. The Government is therefore returning Vehicle Excise Duty to its original purpose - from 2020, the tax on people’s cars will go into a new fund to improve the roads they drive on. And fuel duty will remain frozen this year.
Only millionaires to pay Inheritance Tax. The wish to pass something on to our children when we die is about the most basic human aspiration there is. We’ve long had an inheritance tax in this country, but it was designed to be paid only by the very rich. In recent years, as property prices have risen by much more than inflation, more and more families have found themselves paying the tax. If we don’t do something, the number will double over the next five years.
So from 2017 we will phase in a new £175,000 allowance for your home when you leave it to your children or grandchildren on top of the existing £325,000 threshold. Both allowances will be transferrable to your spouse or partner and if you downsize you won’t lose out. We will taper the relief away for estates worth more than £2 million so the very rich don’t benefit. The result is that people will be able to pass up to £1 million to their children without the Government taking a penny - exactly as we promised. And it will be paid for by reducing pensions tax relief for the very wealthy.
This Budget tells you two important things about today’s Conservative Party.
First, we mean to keep the promises we made - to take the tough decisions necessary to get Britain back in the black, to tackle tax avoidance, to cut income tax for millions of people, to create 3 million new apprenticeships, to give our precious NHS the funds it needs and to take the family home out of inheritance tax.
But second and equally importantly, we will deal with the deficit in a way that is fair with those with the broadest shoulders bearing the greatest burden. The richest are paying a greater share of tax than they were in 2010. And as a result of this Budget, someone in low paid work will get paid more and pay less tax - and be confident that they will be better off than someone who chooses not to work.