The Chancellor's summer UK budget today was long on spin, but the substance was less impressive once you delve into the detail.
The headlines are about wages with the introduction of a new national 'living wage' for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020. In effect this is an increase in the national minimum wage for the over 25’s, not a living wage at all. As the Living Wage Foundation has already pointed out, it is calculated on what the market can bear, not on what workers need to live on. An annex to the OBR report covers the economic impact and interestingly claims there will be a minimal impact on jobs. The wages pill has been sweetened for employers with cuts to Corporation Tax and employer National Insurance contributions for small employers.
While this will help low paid workers outwith the public sector, it has been set below the level of the Scottish Living Wage that applies to most UNISON members in Scotland. If the Scottish Government follows the Chancellor’s lead, as they generally do, public sector workers face four more years of pay restraint with increases capped at 1% per year.
It could be even worse, particularly for young members and low paid members with families. The freeze in working age benefits hit families hardest and young people also lose Housing Benefit until they reach 21. They don’t get the new living wage either. One of the real benefits of the English approach to supporting disadvantaged students at university was maintenance grants. They have been abolished and replaced by loans. The Tories really do have it in for young people - no wonder they oppose extending the vote to 16 year olds!
The increase in income tax personal allowances are a help, but they are a regressive tax cut that benefit higher paid workers more as this IFS chart based on previous plans shows.
The Resolution Foundation has also provided a helpful explanation of why wages alone don't work. The rich also gain from changes to inheritance tax that will cost the Treasury almost £1bn. Tax relief for £1m home owners won't help many in Scotland and will simply entrench intergenerational inequality and increase house prices. It will do nothing for house building. The OBR estimates that the budget changes will cut affordable housing by 40,000. This table from the OBR report shows the extent of upper middle class welfare in this budget.
The measures to tackle tax avoidance are welcome, even if pinched from Labour's manifesto. However, the OBR rates the estimates of income raised as 'very high' uncertainty. They will also have to deliver on the extra HMRC staff, after years of cuts. There is some confusion here between the Chancellor's claimed £750m for HMRC and the Red Book's £250m. The Non-Doms are also being phased out very slowly, giving ample time for the Chancellor's pals to find new ways of dodging tax.
The OBR also estimate that the economic recovery will slow slightly and still depends on an significant increase in household debt. I always find this a scary chart as we all recall what happened last time personal debt increased in this way.
After wages we need to look closely at the impact a UK budget has on Scottish public spending. Cuts in departmental spending (RDEL) will follow a much smoother path than was implied in March, moving away from the previous ‘rollercoaster’ pattern. Real terms RDEL cuts now range from 0.5 to 2.4% a year between 2015-16 and 2019-20. In March, the real cuts in 2016-17 and 2017-18 were 5.8 and 5.4% respectively – larger than any seen in the previous Parliament. RDEL spending is now assumed to fall by an average of 1.5% a year in real terms over this Parliament, compared to the 1.6% over the previous Parliament. Essentially the cut is similar, but spread more evenly over a longer period as this chart from the OBR report shows.
It is difficult to calculate the Barnett consequentials until we see the departmental allocations for devolved services in England. That will probably become clearer in the Autumn Statement. However, the limited good news is that the massive cuts planned for the next two years will be somewhat reduced from the March plans.
The impact on jobs is still significant. UK general government employment is estimated to fall by 0.4 million by the first quarter of 2020, leading to a total fall from early 2011 of 0.7 million. These figures are 0.2 million smaller than projected in March, but still equate to a 13% overall reduction in headcount. The Scottish job losses could be between 30,000 and 40,000 posts by 2020.
The OBR now publishes tax forecasts for the devolved administrations. They only cover the Calman provisions, not the more extensive powers being debated in the Scotland Bill at Westminster. This chart sets out their estimates.
For those interested in pension funds there will be considerable analysis of the tax changes. I also note that tucked away in the Red Book is a reference to pooled investment of local authority pension funds. Something we are at least considering in Scotland.
Overall, doing something about some wages is I suppose some progress from this Chancellor, even if it is only a partial plug for benefit cuts. Welfare cuts for the poor paying for tax cuts for the rich is a more predictable element of the budget along with spending cuts that aim to cut vital public services. I also suspect this is a budget that requires more analysis of the detail - with more horrors yet to be discovered.