Budget 2014: how Osborne can reduce Labour’s poll lead on living standards
Two weeks ago, to mark the launch of their brand new party headquarters, the Conservatives held a closed door event with the last Tory leader to win a majority at a general election. Sir John Major was there to launch an apprenticeship scheme. He also addressed the packed room setting out a “moral mission” for the Conservative Party. He said:
“Education reform to make sure that people are being better educated in order to maximise their abilities, Opportunity, by creating jobs. And we should bear in mind that – when we are creating jobs and wish people to move around the country and take those jobs – they need houses to move to as well.”
While George Osborne wasn’t actually present at the event, it seems from what we have heard over the weekend that the Chancellor was paying close attention to Major’s words of advice. Speaking to Andrew Marr on Sunday morning, Osborne confirmed that his focus this week was on creating the optimal conditions for private sector led job creation and building more homes (by extending the Help to Buy scheme and building the first new garden city for 100 years in Ebbsfleet). He also dismissed calls for a rise in the 40p tax rate, saying that the government’s focus was raising the personal allowance for people on the lowest incomes (he was at pains to reiterate the fact that anyone earning up to £100,000 would benefit from an increase in the personal allowance).
Whatever people say about the Chancellor, there is no doubt that he is sticking to his guns. Slowly but surely the economy is starting to pick up. The question for Osborne is whether he can link his political and policy priorities to a subsequent rise in living standards. Broad based arguments about the creation of 1million new jobs, reducing the deficit, building 15,000 new homes simply won’t cut it. If the Conservatives want to be seen as the party that stands up for hard working people (to coin a phrase) then they must personalise their commitments making a clear link between national economic policy and the impact any policies will have on the cost of living. Here are just a few suggestions:
It’s not simply the creation of jobs that is key to economic growth. The importance of productivity is often under-reported. As Policy Exchange revealed last week, the flexibility of the UK’s labour market has put us in a much better position to weather the effects of the recession. However, real wages have fallen as output per worker has decreased. The decline in wages has, by in large, been in line with falling productivity. Therefore as the jobs market picks up and productivity increases, wages will again begin to rise.
The problem for Osborne is that people do not automatically link an increase in jobs to a rise in their wages. Were the Chancellor able to make that connection – perhaps by setting out plans to make it easier for businesses to hire more staff by increasing the National Insurance threshold – then I would expect to see the Conservatives close the gap on Labour’s poll lead on “living standards”.
Ebbsfleet should be the start of a new wave of beautifully designed, privately funded and locally popular garden cities. As Daniel Knowles observed in his excellent article in the Times: “Ebbsfleet will at best provide 20,000 new homes when it is finished. That is about what London needs very six months with demand.”
The housing debate has so far been a numbers game. The statistics are indeed important with some experts suggesting 100,000 new homes being the equivalent to 1 per cent of GDP. However, talking about hard numbers de-personalises the issue. It also strikes fear into communities who wonder if the state will all of a sudden impose an ugly great development on the edge of their beautiful village. It’s therefore important for the Chancellor to set out the emotional and social benefits of building beautiful new houses. Well-designed new garden cities, built near existing towns and cities could offer affordable, family sized homes to younger generations.
They could also offer older people the chance to live in closer proximity to their families. Show me a grandparent who doesn’t want to live closer to their grandchildren. At the moment sky high property prices and a lack of supply have led to younger people having to move hundreds of miles from their roots and family members in search of a job and a place with plenty of decent transport links and amenities such as restaurants and bars. Garden cities and housebuilding in general could be a real economic and social “game changer” but the language need to be less divisive (Nimbys v first time buyers) and more focused on keeping families together.
A great deal has been made of Osborne’s reluctance to increase the 40p tax threshold. The number of people paying the higher rate of income tax has risen steadily from just over 1.7 million in 1993/4 to 4.4 million and is expected to increase to over 5 million next year. That is a staggering one in six of taxpayers, up from one in 20 when Nigel Lawson was Chancellor. However, the people who have suffered the most from the recession are not those earning £40,000 a year. The people who have been hit the hardest are those in what economists term the 40th percentile – earning around £18,000 a year. So it is right that the Chancellor looks to prioritise raising the personal allowance over a change to the 40p rate.
That said, if he was going to look at altering the higher rate bands, the most interesting idea I have seen to date is from the campaign group Renewal. They suggest abolishing the 40p band and moving the higher rate threshold to around £62,000. They estimate that about 2 million people would benefit from this tax cut. Combined with a rise in the personal allowance, Osborne could actually take Renewal’s idea and make the case that during the course of the coalition, the government has actually given 97 per cent of the country a tax cut. A pretty strong electoral message.
Reducing unemployment, increasing the supply of housing and boosting the pay packets of people on low and middle incomes are all policies that will help drive economic growth. The Chancellor is sometimes dismissed as a political tactician lacking a real strategic direction. I think this is a lazy assumption. He has surrounded himself with some of the brightest advisors and has a clear understanding of what is needed to both drive economic growth and increase living standards. The trick is to continue doing what he’s doing but to ensure that he continually links the two.