Budget 2015: Experts respond

Boxing clever? Osborne delivers. Andy Rain/EPA

George Osborne, the chancellor of the exchequer, has delivered the first Conservative budget in nearly 20 years and used it to announce plans to introduce a compulsory living wage, cut the welfare bill and cap public sector pay. He also sought to take more people out of inheritance tax and recoup more tax from the wealthy. Expectations are for annual growth at more than 2% for the next five years and for the creation of one million extra jobs by 2020. Here, we bring you live, expert reaction to the budget from academics in a variety of fields.

Economy and living wage

Michael Kitson, lecturer in Macroeconomics, University of Cambridge

This was a budget that was more about redistribution than growth. As expected, it is the most disadvantaged who will continue to bear the brunt of austerity, with the welfare bill being cut to try and reduce the budget deficit. Those on low pay may think they will be better off with the introduction of the living wage (a rebranded national minimum wage) but they will lose out by the reduction of in-work benefits. And businesses are being compensated for a higher wage bill through cuts in corporation tax.

The big omission in the budget was any coherent plan for productivity – and it is productivity that will be the primary driver for future growth of real wages. The hotchpotch of measures on transport and apprenticeships may help but they will do little to close the productivity gap between the UK and the other major industrialised countries.

Helping hand needed. Jessica Hill / AP/Press Association Images

Siobhan Benita, director of Policy and Strategy in the Department of Economics, University of Warwick

This budget was always going to cover more than just austerity measures – as central as these are to the chancellor’s pledge of reaching a budget surplus in this parliament. Given the UK’s so called “productivity puzzle” this budget also needed to address how this government will support businesses, stimulate economic growth and increase productivity.

At first sight, it appears that Osborne has gone some way to addressing these, but probably not as far as the business community would like. The cut in corporation tax to 19% in 2017 and 18% in 2020 will certainly be welcomed by business owners, as will the increase in National Insurance employment allowance for small firms by 50% to £3,000 from 2016. Less welcome perhaps will be the introduction of a national “Living Wage”, a policy which some companies will undoubtedly find challenging. And many business organisations have also reacted with some concern to the chancellor’s proposals for an apprenticeships levy – more detail will need to be provided on this to waylay their concerns.

Overall, Osborne’s offering to business is a mixed one. I suspect the response from business will be lukewarm.

David Spencer, professor of economics and political economy, University of Leeds

The budget will not solve the deep-seated problems of the UK economy. The over-reliance on household spending and borrowing remains, despite the policies announced on Wednesday. There was some cheer in the announcement of an increase in the newly termed National Living Wage. But, in truth, this is only likely to make up for losses faced by workers in previous years. The rise in the minimum threshold for pay also needs to be set against the reduction of tax credits.

The chancellor has delayed the expected return to a budget surplus by a year to 2019-20, in part because the government intends to borrow more in coming years. This is a tacit admission that government borrowing has its place in securing the foundations for a sustainable economy. At least while the trade deficit persists and business investment fails to take-off then the government cannot cut the budget deficit without undermining economic growth.

The UK economy is still making a one-way bet on higher household spending. The OBR suggests that household debt will rise above previous forecasts, reaching 150 percent of household income in 2016. Household debt levels are set to grow after 2016 and to reach 167 percent of household income by the start of 2020. The last time levels like this were achieved was just before the last global financial crisis. This fact should worry us all.

Andre Spicer, professor of Organisational Behaviour at Cass Business School, City University London

The budget will leave the UK’s productivity puzzle unsolved. Since the financial crisis, productivity has been falling while all our major competitors have upped their game. Although UK workers have among the longest working hours in Europe, they produce the least. This is a huge long-term problem because real long-term economic growth is based on increasing productivity. If we want to pay higher wages, we need to help our worker be more productive.

There are some widely accepted ways for boosting productivity: improve infrastructure, increase skill levels, extend the use of technology, boost innovation, and improve the quality of management. The budget only dabbles with two of these.

Welfare and equality

Noel Whiteside, professor of Comparative Public Policy, University of Warwick

Perhaps it was not so one-sided: banks, dividends, tax avoiders are hit as is tax relief for private landlords and housing association rents for poor households. A new National Living Wage (at £9 per hour by 2020, hardly radical) is introduced – amid much rhetorical reference to the mantra of a high-wage, low-tax, low-welfare economy for the UK.

However, £12 billion in welfare cuts were there and tax credits sat in the cross-hairs as the chancellor’s main target. Income thresholds were cut, taper rates increased, to reduce the amounts currently paid to the 2m UK working households. Tax credit support for third and subsequent children will disappear and the Employment Support Allowance for disabled people deemed capable of work will be cut to the level of the Job Seeker’s Allowance.

The devil lies in the detail. The impact on already poor households can only be calculated once this budget is published. But this budget was as much political as economic and spelt out the chancellor’s bid to take over from David Cameron as a future Tory prime minister.

Karen Rowlingson, professor of Social Policy, University of Birmingham

Inheritance tax is very unpopular so George Osborne’s reform may well receive considerable public support – but, prior to this budget, only 5% of those who died left an estate which was subject to any inheritance tax at all. By increasing the threshold, Osborne is giving a hand-out to this very wealthy group.

Inheritance tax is unpopular with a lot of people. Natesh Ramasamy, CC BY

By contrast, cuts to benefits and tax credits will gut the incomes of the very hardworking families that the Conservatives have long said they stand up for. While changes to the income tax threshold have reduced the amount of income tax paid by lower-paid workers, these changes cannot take the place of tax credits which so many families rely on to make work pay. We have already seen, over the last few years, that in-work poverty has increased and now a majority of those in poverty live in families in which there is a worker. Such in-work poverty is only going to increase as the result of this budget. Incomes will plummet.

Chris Rowley, professor of Human Resource Management, City University London

We have just had some eye-catching announcements, including not only a reduced maximum household benefit cap, but especially a two-child tax credit cap. This has echoes of an China-style child-limitation policy or even economic eugenics. Another one is the new National Living Wage of £9 per hour by 2020. While good in the Orkneys, I am not sure how great this is in London and the South East. Also, what about those under 25 and the national minimum wage where the hourly rate for apprentices is just £2.73 and £3.79 for 16 to 17-year-olds? There will also be an “earn or learn” youth obligation and cuts to housing benefits for the under 21s. The young seem losers for sure.

This is part of a debate that has increasingly come to the fore: that the state should not be subsidising poor and low-paying companies by topping-up badly paid worker’s incomes. Rather, the government should be encouraging UK PLC onto a better paid and higher productivity footing. Even some Conservatives, such as Iain Duncan Smith, imply they want a more interventionist state, with the government to “incentivise” companies to increase wages, while others even want the government to force companies to pay higher wages.

Bruce Stafford, professor of public policy, University of Nottingham

The summer budget rolls forward some of the last government’s exemptions for disabled people. For example, disability benefits are exempt from the four-year freeze in working-age benefits and tax credits. The disabled child premiums in tax credits and universal credit continue, so there is at least some protection against the limiting of tax credits to the first two children.

Those disabled people in low-paid work and aged over 25 will benefit from the new National Living Wage premium. The Chancellor also decided to forego a possible spending cut by confirming that disability benefits would not be taxed or means-tested. However, some disabled people in receipt of Employment Support Allowance will see a cut in their benefit (as it will be reduced to level of Jobseeker’s Allowance).

But on the wider issue of empowering disabled people, of promoting more choice and independence, the chancellor’s budget has done nothing.

Tax and non-doms

Prem Sikka, professor of Accounting, University of Essex

Osborne has delivered a tax concession for the well-off and promises of jam tomorrow for the less well-off. The government has announced welfare and tax savings of some £17 billion. Public sector pay rises are capped at 1% a year for the next four years while the income tax personal allowance will rise from £10,600 to £11,000 will add about £80 to the take home pay of workers. But this is hardly a compensation for the real-terms cuts. We also have a living wage for the over-25s, not now but by 2020 … And the under-25s need everyday essentials too.

Mortgage tax relief available to buy-to-let landlords will be restricted to the basic rate of income tax, but even that is not available to normal people struggling to get on the housing ladder. The bank levy which was expected to generate about £3.5 billion a year is to be replaced with an 8% surcharge on profits. That will hardly worry banks which are very adept at shifting profits to low-tax jurisdictions.

The government hopes to raise £5 billion from a clampdown on tax avoidance, even though previous efforts have not delivered the promised outcomes. The naming and shaming of serial tax avoiders will hardly worry big corporations. There should be punitive measures.

Ronen Palan, professor of International Politics, City University London

George Osborne has always exhibited a genuine knack for theatrical gestures and big announcements, and has carefully avoiding fiscal policies that would make much of a difference to the rich and powerful in British society. This is not to say that I do not support the removal of the anachronistic non-dom fiscal provisions. I certainly do. But I doubt whether the removal of one provision will make that much of a difference.

Non-dom status has undergone changes since 2008, after which non-doms pay a flat tax of between £30,000 and £90,000 annually on their worldwide income. Predictably, the provision has benefited only the very rich, with less than 1% of the potential population of non-doms choosing to take advantage of the provision and preferring to pay the flat fee rather than UK income tax.

Removing the permanent provision is a typical halfway house and addresses only the most obnoxious aspect of the non-dom status. It is a subtle message to a constituency of the rich and powerful – it is not about tax, but about protecting Britain’s reputation as a welcoming country to the wealthy of the world.

Education and training

Roger King, visiting professor at the School of Management, University of Bath

The ability to raise fees in line with inflation that George Osborne has announced for those universities “offering high teaching quality” seems to be jumping the gun on the recently announced plans to reward excellent teaching through a Teaching Excellence Framework.

As yet we have no real idea whether we are going to develop indicators for good teaching that will be acceptable as well as robust. At the same time, unless inflation starts to pick up the pace, it is not clear how much of a reward this is for universities or whether it will apply to all courses or only those showing teaching excellence.

Open University graduation day in Manchester, 2014. The Open University, CC BY

Unless tuition fee increases are allowed for all we could start to see a number of research-intensive universities seriously contemplate going fully private.

Alison Fuller, professor of Vocational Education and Work at UCL Institute of Education

We heard in George Osborne’s speech that the government will introduce a levy on large employers to deliver on its pledge of 3m apprenticeships in this parliament. This is a radical new policy lever. Employers taking on apprentices are promised that they will receive more funding than they pay out.

However, as Lorna Unwin and I pointed out in a recent Fact Check for The Conversation, two-thirds of those starting apprenticeships are already in employment (so called “conversions”), with the scheme being used to do little more than accredit existing skills. This helps explain why around 40% of apprentices are aged over 25.

There are big questions about how the levy will work, how much it will be, the size of firms liable to pay and, perhaps most crucially, whether employers will be able to claim back their levy and more, if they convert existing employees into apprentices. This may enable the 3m target to be met but the challenge of achieving high quality still to be resolved.

Ann-Marie Bathmaker, professor of Vocational and Higher Education, University of Birmingham

Will scrapping maintenance grants for students from low and middle-income families reduce their participation in higher education? Possibly not, as my colleague Marion Bowl and I have recently pointed out. Graduates still have an earnings advantage over non-graduates and a better chance of getting a job – so higher education will continue to seem a good bet.

But while the chancellor, George Osborne, is determined to reduce government debt, his July 2015 budget shows that he is equally determined to increase private debt, and among the “hardworking” people that he speaks of so regularly.

For although this government continues to make cuts in public spending, based on a common sense (but not necessarily making sense) notion that “our country” has to “live within its means”, cuts to maintenance grants are just one example of how low-income families who send their children to university have less and less chance of living within their means.

We need to look not just at how scrapping maintenance grants will affect participation in higher education, but how it will affect students after they graduate, and the inequalities that are likely to ensue for the “graduate debt” generation.

Northern Powerhouse

Christopher Bovis, professor of business law, University of Hull

If the Northern Powerhouse proposal is going to work, it will need to mirror the dynamics which have allowed the south to grow so much bigger and faster. That means attracting a critical mass of businesses and industries to create a strong network of economies.

As Osborne clearly understands, the government has to deal with a chronic lack of investment in transport infrastructure. This is needed to support economies of transport, where factors of production (labour and capital) move freely and efficiently. Better transport infrastructure will also improve connectivity amongst economic hubs, where know-how, ideas, production methods can be optimised.

The transport infrastructure announcement is therefore not a policy in itself, but the bare bones of a much bigger industrial policy for the UK – a genuine attempt to devolve powers to the regions on the back of real infrastructure funding and governance restructuring. Such an environment has been already created in the North West of England, and Osborne has now begun the process of replicating it in other city-regions.

Alex Nurse, research associate: geography and planning, University of Liverpool

Although the Northern Powerhouse is a key Conservative pledge, the chancellor has seen his plans significantly weakened by last month’s announcement that the rail improvements across the North – the thematic glue of the Northern Powerhouse – would be indefinitely delayed. This stands at odds with his desire to be “bold on infrastructure”. His concession, it seems, was the announcement of £30m of funding for the creation of “Oyster”-style integrated ticketing systems across the North.

Nonetheless, the chancellor sought to renew his commitment to the Northern Powerhouse. Alongside previously announced plans for the devolution of health powers, Osborne announced that fire and children’s services would be devolved to those city regions prepared to do a deal with government, as well as the ability to control Sunday trading hours – as trailed ahead of the budget. Manchester is the first to receive these powers, but Leeds, Liverpool and Sheffield are now in talks to take on similar powers.

Plans are also in the offing for a similar Midlands Powerhouse, focusing on England’s central belt. It increasingly seems that the vision of the Northern Powerhouse will likely be delivered by a series of booming cities, rather than a coherent joined-up Northern region.

Health

Andrew Street, professor at the Centre for Health Economics, University of York

Stating that the NHS is safe in Conservative hands, George Osborne re-iterated the manifesto promise to increase the NHS budget by £8 billion over the course of the parliament, on top of £2 billion promised this financial year – £10 billion in total. This is just above the minimum required to keep up with the growing demand on services over the next five years and needs to be coupled with productivity improvements of 2-3% a year, twice the annual average of 1.26% realised since 2004-05.

Extra help for the NHS will be welcomed.

With the majority of hospitals forecasting deficits for 2015-16, the NHS is going to struggle to live within the means promised by Osborne. Hospital costs will increase further if plans for a 24/7 service are implemented in full. And cuts elsewhere will add to the pressure on the NHS. People no longer receiving local authority-supported social care are turning to the NHS instead.

Doctors have warned that cuts of £200m to supposedly “non-NHS” public health budgets will undermine services to reduce drug use, smoking and obesity, proving a false economy if prevention is better than cure.

Osborne highlights the NHS as a government priority but, even with additional funding, it will be difficult for the NHS to avoid overspending over the course of the parliament.

Adoption

Donna Peach, lecturer in Social Work, University of Salford

Osborne has announced an extra £30m to speed up the adoption process. This comes amid concern that hard up local authorities may be resistant to paying £27,000 to an adoption agency to find an approved prospective adopter for a child. The new money will help them cover these costs.

During the term of the coalition government, the number of children being adopted rose and then fell. The government is keen to bring numbers back up with this extra funding and by creating regional adoption agencies. For children waiting to be adopted this is positive as it increases the pool of adopter’s available to them.

But this glimmer of sunshine is set against a much gloomier sky. The Institute for Fiscal Studies reports that England’s poorest communities have been most affected by austerity measures. This trend is set to continue as Osborne ploughs on with his extra £12bn in cuts. Unfortunately, the personal cost of social policies on adopted children and their birth families rarely figures in budgetary spending plans.

Defence

Simon J Smith, research associate, Dept of Politics, Languages & International Studies, University of Bath

George Osborne’s announcement today that the United Kingdom would “meet the Nato pledge to spend 2% of our national income on defence”, not just for this financial year, but for “every year of this decade” came as quite a surprise for defence watchers and, no doubt, the MoD itself. This announcement will give the MOD some consolation that the Strategic Defence and Security Review (SDSR) will not end with a swingeing budget cut. The commitment to maintaining the size of the British Army at 82,000 was less of a revelation as it was promised in the Tory manifesto and has since been reaffirmed publicly.

The unexpectedness of today’s commitment came in two forms. First, if there was going to be a commitment to the 2% past the next financial year, it was not expected to come until the SDSR, the National Security Strategy (NSS) and the Comprehensive Spending Review (CSR) were completed by the end of the year. Second, it was not that long ago that many were predicting that the UK’s defence spending looked likely to fall below the 2% target after April 2016.

What seems clear is that mounting US (and Tory back bench) pressure for the UK not to drop below the 2% threshold has resonated with the government. However, it remains to be seen if this really is a gain to the UK defence budget or just a case of creative accounting. Nonetheless, this new public commitment will send a strong message of political will to Britain’s NATO allies. There can be little doubt that the UK will now use this to defend its position as a top tier NATO contributor.