Osborne Rebrands U.K. Tories by Cutting Welfare, Raising Pay

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George Osborne
U.K. chancellor of the exchequer George Osborne , holds the dispatch box containing the budget in London on July 8. Photographer: Simon Dawson/Bloomberg

Chancellor of the Exchequer George Osborne set out a budget, prime ministerial in its ambition, that recrafts the U.K. welfare state on Conservative principles and draws battle lines for the 2020 general election.

Osborne announced deep cuts in benefits, albeit twinned with the introduction of a compulsory “living wage” to help the lowest earners, paving the way for a comprehensive reform of the welfare system. Under new rules, child tax credits will be limited to the first two children.

“We have a welfare system that is simply unsustainable at the moment,” Osborne told BBC Radio 4’s “Today” program Thursday after being asked whether he realized his measures would make many families worse off. “It’s part of saying to our country we have to have a better contract.”

While some measures he announced Wednesday, such as a cut in corporation tax, were geared to appease business, many were aimed at raising more revenue from the wealthy. They included higher levies on dividends, closing a loophole used by hedge funds, and removing some tax breaks for private landlords.

“The Tories were faced with a big choice: go for slash-and-burn, or consolidate and do something much cleverer, hugging the center ground and leaving Labour with no breathing space at all,” Tim Bale, professor of politics at Queen Mary University in London, said in an interview. “It’s a fundamental break from a Thatcher style of running the economy, re-evaluating the Tories’ position as the party of the rich. It will leave Labour very worried.”

Smoother Path

The budget, the first by a Tory majority government in almost 20 years, built on promises before May’s election to balance the books while smoothing the path of fiscal adjustment and thus delaying by a year Osborne’s goal of achieving a surplus. It also sought to consolidate the support the Conservatives won from Labour by borrowing heavily from the opposition’s program.

Proposals such as raising the minimum rate of pay, taxing business to fund apprenticeships and curbing the advantageous “non-dom” status that cuts tax for thousands of Britain’s wealthiest residents were met with wry smiles from the opposition benches in the House of Commons for their similarity to elements of the Labour manifesto.

“Part of this budget could have been written by Ed Miliband,” the former Labour leader, said Tom Mludzinski, director of political polling at ComRes in London. “Osborne has to think about the fact that he will be trying to take over as leader, and he obviously has ambition.”

Odds Shorten

With Prime Minister David Cameron due to step down as prime minister before the 2020 election, Osborne’s odds on taking over as Tory leader were cut by bookmakers in the wake of his budget speech. Ladbrokes Plc installed the chancellor as favorite in place of London Mayor Boris Johnson.

Osborne also made another concession to political opponents who’d argued ahead of the election that his plan to eliminate the deficit in three years was unattainable. The target date has now been pushed back to 2019-20.

An increase in the starting threshold for the middle rate of income tax -- 40 percent -- to 43,000 pounds ($66,000) a year will be accompanied by raising the level at which people start paying tax at all on their earnings.

Cuts in housing benefit, removing social housing entitlement for 18-to-21-year-olds and forcing higher earners in state-subsidized housing to pay market rents were accompanied by a crackdown on tax breaks to prevent buy-to-let landlords from fully offsetting the cost of their mortgage against tax.

‘Turning Point’

“There has been a gradual process of Osborne emerging into the spotlight, and Cameron gradually receding, and that’s what today was partly about,” said Bale. “It’s not just a budget: it’s a huge philosophical and practical turning point.”

Still, this rebranding of the Conservative Party raised questions as to whether an increase in minimum pay could make up for the impact of 12 billion pounds of benefit cuts.

While the Treasury produced calculations suggesting that all working families receiving welfare would be better off in real terms in 2020, Labour said that by its estimates, a single parent working 16 hours a week on the minimum wage would be 460 pounds a year worse off.

The Living Wage Foundation, whose campaign for higher minimum pay Osborne attempted to co-opt Wednesday, raised doubts about whether his proposal matched its goal. Osborne’s new standard of 7.20 pounds an hour compares to the existing minimum wage of 6.50 pounds, set by an independent panel, the Low Pay Commission.

Different Calculation

“The living wage is calculated according to the cost of living, whereas the Low Pay Commission calculates a rate according to what the market can bear,” the foundation’s director, Rhys Moore, said on its website. “Without a change of remit for the Low Pay Commission, this is effectively a higher national minimum wage and not a living wage.”

Cuts to welfare benefits for those in work mean the living wage may also need to be higher than the foundation’s current estimates, Moore said.

“Osborne has pitched the Conservatives as the party of the low-paid,” Ian Stewart, chief economist at Deloitte in London, said in an e-mail. “But whether the reality matches the ambition depends on whether private-sector wages more than fill the gap left by shrinking in-work benefits.”

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