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.