It is one of the iron rules of British politics that chancellors take tough decisions in the budget that immediately follow a general election – and George Osborne did not break with tradition.
The meat of the first all-Conservative package in almost two decades was a series of measures designed to turn a deficit of £70bn this year into a surplus by the end of the parliament. There will be tax increases that will raise a total of £47bn by 2020 and welfare cuts that will raise £35bn.
Even so, there will be less pain than was promised in the last coalition budget in March. The deficit reduction programme will be spread over a longer period and the squeeze on public services spending will be eased.
This makes sense. Osborne had to choke back on the pace of deficit reduction in the last parliament when a combination of over-zealous austerity and the crisis in the eurozone resulted in a much sharper than expected slowdown in the economy. With Greece teetering on the brink, the Chinese stock market in meltdown and the US economy doing less well than expected, it is an uncertain world out there. A more cautious approach to balancing the books is fully warranted.
The budget was also an acknowledgement that the deep-rooted problems of the economy remain unsolved. More generous investment allowances, higher spending on roads and a training levy are designed to tackle three of those long-term challenges: the shortage of modern kit, infrastructure and skills.
Much of the budget had been announced in advance. The rabbit from the hat was the announcement of a compulsory national living wage to be set at £7.20 an hour next April, rising to an estimated £9 an hour by 2020.
There is both a political and an economic motivation for this move. Politically, it helps Osborne make the case that the Conservatives are the party of hard-working people, a key message during the election campaign. Economically, the national living wage is designed to offset the impact of the very deep cuts in tax credits, which will hit those on the lowest incomes hard.
For many of those on low pay, the national living wage increase will not compensate for the tax credit losses. But it allows Osborne to say he is “giving Britain a pay rise” at the same time as saving billions from the welfare bill.
