Seven years on from the crisis, Britain remains in the shadow of the slump. Sure, the economy is growing, and wages are now rising, but on Thursday the Bank of England was tasked with explaining why it was keeping interest rates at the once unimaginable level of 0.5%, for the 80th month in succession. By pointing to chill winds from China, and real earnings that remain down on 2007, the Bank convinced the markets bargain basement rates will be here for another year or more, and triggered a little run on the pound. Meanwhile, new Halifax numbers recorded house prices rising at an unsustainable 10%, heightening fears that the emergency economic medicine could be storing up problems for the future.
The picture is appreciably, if not dramatically, darker than in the summer, when George Osborne – his confidence swelled by the Conservatives’ unexpected majority – staked his audacious claim to a new settlement, involving “low taxes, low welfare and high pay”. The high pay part of the deal involved a hike in the minimum wage, which is still worth trying in Britain’s relatively high-employment economy, but the possible implications for jobs look riskier now than they did when decent growth looked more assured. The low tax element was dubious, coming as it did in a budget of post-election revenue raisers in fields from insurance to property; in the months since, the thinktanks have confirmed that the mightily hyped increase in tax allowance will be marginal to most people’s living standards. It is, however, on the low welfare count that the chancellor has come truly unstuck.
For, after years of demonising supposed layabouts on unemployment benefits, the chancellor stretched the definition of welfare to include tax credit payments made to low earners, delegitimising many of the most pinched “hard working families” that he claims to champion. Over the summer, the Resolution Foundation exposed how the effect would be to leave work paying less. Its analysis played no small part in persuading the Lords to send the chancellor back to the drawing board to redesign his plans. On Thursday the foundation brought together powerful voices from both sides of the political aisle to demand a significant overhaul, and also provided insightful new thoughts on the practical options.
The idea gaining traction on the Conservative benches is to phase in the sudden cuts planned for April, so that the credits fall only once the personal allowance and minimum wage rise. It sounds like a plausible tweak, but it doesn’t stack up on inspection, because the tax credit losses are simply too big to be redeemed even if all the changes are synchronised. The root problem here is that the credits are targeted on poor working families with more mouths to feed, whereas the tax allowance and minimum wage spread money much more thinly across a far wider group. Nor will it be lost on this most political chancellor that ratcheting the credits down over several years will involve pushing some losses uncomfortably close to the next election. Other tweaks that have been breezily offered as cost-free fixes, such as allowing the poorest workers to keep their credits while withdrawing them faster from the slightly better off, emerge as no solution at all; that would spring a new poverty trap just a little way up the income scale.
The chancellor may resort to the time-honoured trick of imposing full cuts on new claims, while exempting existing recipients. There is no principled case for such a sharp distinction between people who claim on one day and the next, even if it avoids the political pain of incomes suddenly dropping. It would, however, be more honest and wiser to go back to first principles and ask why it is that the slick proposition of the summer budget has unravelled.
Britain is a low-pay and low-productivity economy, and will likely remain so in the near term, even with the higher minimum wage. There are solutions that should eventually reduce the need for wage subsidies – better training, financial reforms to encourage productive investments over property speculation, and perhaps also the devolution of power to the regions that Mr Osborne has embraced. But all these things will do their work over decades, not years. Meanwhile, it has to be right to maintain the credits that can make work pay in a low-wage country. The chancellor could still hope to meet his fiscal targets, even without the £4bn of savings. Smarter to do without them, than to plough pig-headedly on in the name of a political war on welfare.
