Half a cheer for George Osborne

It is good news, at least to some extent, that George Osborne has announced that some cuts will be made in government spending as soon as the Conservatives enter office. But, he should be careful. His targets are easy ones: tax credits for the better off, child trust funds for the better off, and government advertising.

The third item is part of a general declared strategy and that is fair enough. The other two items are certainly valid candidates for cuts, but he should consider the micro-economic consequences as more may need to be done if the cure is not to be worse than the disease. Things such as tax credits and child trust funds were extended to higher earners or introduced as universal for a good reason. In the early years, Gordon Brown’s huge efforts to transfer income to poor pensioners and families with children led to enormous marginal tax rates. His poverty-reduction strategy almost guaranteed that poor people would stay poor because it was not worth earning more. So the benefits were extended up the income scale (or introduced as universal in the case of child trust funds) to reduce the disincentives that resulted from earlier policy. Thus we ended up with the situation that people earning nearly £60,000 a year receive regular state welfare top ups.

George Osborne will land us again with the problems that Gordon Brown created when he introduced tax credits. He needs to look at the whole system – and quickly. Benefits might well have to be cut across the board – and certainly for middle-income people. It certainly makes no sense to be raising National Insurance contributions for the whole workforce whilst refusing to take the step of cutting tax credits (which are, in fact, welfare payments) for the whole workforce. And, as for the child trust fund, this should just be chopped altogether – immediately. It surely has no long-term place in our welfare system. To be taking taxes from hard-pressed parents – who might be in debt – in order to put the money in the name of their children locked up for 18 years has to rank as one of the most perverse policies ever.

While I’m having a go. Tax credits lowered some marginal taxes and raised others. You can only shift the curve: it can’t go from receiving benefits to having none without a drop off somewhere. Under major, according to our research at CentreForum, the replacement ratio for low paid workers was frequently welll over 100% – because there were no tax credits. They are a fairly good thing, badly executed and appallingly publicised. There is no need to condemn them just because Brown implemented it – in fact, negative income taxes at a low income are a good RW idea IMHO

Well, half a cheer for saying he’d cut govt advertising, maybe £0.5 billion a year or something, but his musings on tax credits are way off piste.You must realise that tax and benefits are the same thing, they take with one hand and give with the other. The impact of means-testing tax credits or CTF for higher income people has exactly the same effect as hiking their marginal tax rate slightly.The whole tax/welfare system should be boiled down to a flat rate universal Citizen’s Income of £x per week (to replace Child Benefit, tax credits, IS, JSA, personal allowance, tax breaks for pensions, state pension etc etc) and a single flat tax rate. Choose your own variables!!

Mark – A universal citizen’s income would have many advantages, but I’m not sure how housing benefit would fit in, particularly for those families in London getting tens of thousands of pounds a year.

Giles – we are probably not a million miles away. I am not saying that all benefits should be withdrawn at a given income level, but I also think it is crazy that they go so far up the income scale. What I was meaning to say is that simply to stop them for people so far up the income scale will raise marginal withdrawal rates somewhere else. Osborne has to decide (a) how much the poorest should get and (b) how quickly it should be withdrawn. The problem needs to be looked at in the round, not sliced up into separate problems. I certainly don’t condemn things just because Brown implemented them – independent Bank of England?

Fair enough. And as someone who read and loved Lawson’s book on life in Number 11 this year, I think Brown should make more generous concession to the man who actually first promoted the idea of central bank independence.

Post new comment

The content of this field is kept private and will not be shown publicly.
Type the characters you see in this picture. (verify using audio)
Type the characters you see in the picture above; if you can't read them, submit the form and a new image will be generated. Not case sensitive.

Invest in the IEA. We are the catalyst for changing consensus and influencing public debate.

Donate now

Thank you for
your support

Subscribe to
publications

Subscribe