Thatcherism Makes a Comeback

Radical move.

Photographer: Stuart C. Wilson/Getty Images

Margaret Thatcher would have been proud of the economic plan that Chancellor of the Exchequer George Osborne laid out Wednesday on behalf of Britain's new all-Conservative government. Cuts to corporate, income and inheritance taxes? Check. Cuts to welfare? Check. Smaller government and higher defense spending? Check. 

In one way, moreover, this was an advance on full-throttle Thatcherism. Osborne shrewdly leavened his budget with more populist measures. 

Amid all his triumphant rhetoric about creating a "higher wage, lower tax, lower welfare economy," Osborne pledged to raise the minimum wage -- to 9 pounds ($14) an hour by 2020, from 6.50 pounds -- and to raise income-tax thresholds for low- and middle-income families. He also put extra money into the U.K.'s free (and wildly popular) universal health-care system. 

These less conservative features may make the budget go down easy for ordinary Britons. Less certain is whether these moves can give the economy what it most needs -- increased productivity -- as Osborne has claimed.  

Osborne has clearly learned from past mistakes. On one occasion, he infamously managed to cut taxes on the rich while raising them on Cornish pasties, a popular snack. And he can afford to be radical because he is flying high. The U.K. grew by 3 percent last year, the fastest of the G-7 economies, and it is forecast to grow at a healthy 2.4 percent again this year. Private-sector jobs have continued to multiply, forcing unemployment down almost to pre-recession lows. Tax revenues are coming in unexpectedly high, and the government plans on a windfall by selling off its share in banks that were nationalized during the financial crisis. 

So had he wished, Osborne could have eased back on cuts to welfare and government spending. He did a little, but only in smoothing the trajectory to a planned budget surplus by one year, to 2020. Mainly, he drove forward his goal of reshaping the relationship between British citizens and their state. May's surprisingly large Conservative election victory has freed the party of its coalition partners in government, and Osborne made the most of his liberty. 

That's mostly good. Britain's public sector undoubtedly could use some further pruning. 

But some aspects of Osborne's plans are questionable. Taking aim at the 30 billion pounds Britain spends annually on tax credits and housing subsidies for low-income workers is understandable -- that's a huge number -- but these tax credits are one reason the U.K. succeeded in avoiding high unemployment after the financial crisis hit. Raising the minimum wage and the income-tax threshold may not suffice to maintain the incentive to work rather than claim benefits.

That's especially true for working lone parents, who, according to the Joseph Rowntree Foundation, an anti-poverty think tank, rely on credits and benefits for 45 percent of their incomes. Without that support, many couldn't afford the child care that enables them to work. So Osborne will have to make sure, for example, that his pledge to radically expand free child care is realized quickly.

A higher minimum wage is a risk in its own right: It might cost jobs. And Osborne's claim that Wednesday's budget would finally get to grips with Britain's surprisingly slow growth in productivity didn't convince. 

ukproductivity

Fixing productivity is the key to longer-term prosperity, and Osborne included some measures, such as building more roads and boosting apprenticeships, with this in mind. But the gap between rhetoric and substance was wide.

It's Osborne's ability to solve the productivity puzzle that will determine whether his budget proves to be another Conservative success.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.