Summer Budget 2015: Policy Exchange analysis

Jul 8, 2015

On the Living Wage

By far the biggest announcement of the Budget was, of course, the announcement of a new Living Wage Premium to be paid on top of the Minimum Wage for those over 25. The OBR estimates that this will see the effective Minimum Wage rise from £6.50 today to £9.35 by 2020, benefitting around 6 million people – but at the cost of 60,000 jobs, a small fall in average hours worked and slightly higher inflation.

While this is clearly a significant change, it is not quite the same as the calls from many to simply replace the Minimum Wage with the Living Wage. The Low Pay Commission is staying and so is the existing National Minimum Wage, but for under 25s. Also, notably, the Chancellor’s new ‘tax free minimum wage’ policy does not apply to the Living Wage Premium. Neither is the Government using the traditional methodology for calculating what the Living Wage should be, which is based on the opinion of the public on what is needed for an ‘adequate’ standard of living.

Instead, it plans to simply raise the minimum wage to 60% of the median wage by 2020, claiming influence from a recent report by the first head of the Low Pay Commission, Sir George Bain, for the Resolution Foundation. Sir George, however, also emphasised that a 60% target would show the limit of what you could do with a legislated minimum wage – at the upper end of what international and domestic evidence could support. If the twin forces of technology and globalisation keep putting further pressure on low pay, we are never going to solve this problem through legal wage floors alone – instead we are going to have to look to increased productivity, cutting back on the taxes that still exist on work such as National Insurance, and even, in the long run, a more generous Universal Credit.

On Welfare

Without the introduction of the “National Living Wage” and increases in the income tax personal allowance, the changes to the welfare system would have been painful. Taken together, however, the Treasury estimates that 8 out of 10 working households will be better off in 2017-18 by an average of £130. The principle of making sure that work is financially rewarding is evident in the anticipated combined effects of the policies – a typical renting household with one child, and one adult in work at the current minimum wage, is expected to see their net income rise by 6% in real terms over the Parliament, whereas the same household with no one in work is expected to see their income fall in real terms by 4%.

While most of the changes had been well trailed, three pieces of policy detail are worth pointing out:

  • Discretionary Housing Payments (DHPs) are provided by councils to help Housing Benefit claimants cover costs, should they be struggling to make rent. Following the Coalition Government’s Housing Benefit reforms, DHP funding was increased in anticipation of increased demand from claimants. This Budget announced £800m for DHP’s over the next five years, maintaining a high level of support, and in anticipation that some people will struggle to manage the transition between their old and new Housing Benefit entitlements.
  • Reducing rents in Social Housing in England by 1% over 4 years will mean that Housing Associations and Local Authorities will have to deliver efficiency savings to pay for it. It has already been noted in the last Parliament’s round of cuts that more efficient councils will find it harder to realise these (by definition, they had less fat to trim). The same will be true in this Parliament, and how different Local Authorities approach this exercise will be closely watched.
  • A new Youth Obligation for 18 to 21 year olds receiving Universal Credit was announced. From April 2017, young people will participate in an “intensive regime of support” from the first day of claiming benefits. After 6 months they will be expected to apply for an apprenticeship or traineeship, or go into a mandatory work placement. The success of this policy will depend on the detail of the “support” given to claimants – recognition of individual barriers to work will be key to getting them into employment.

On Public Spending

The big picture of this Budget was a substantial easing of the forecast cuts to public spending over the next Parliament, making this Autumn’s Spending Review look much more achievable. The Chancellor was helped a little by a boost of £4bn a year so in higher tax revenues in the OBR’s forecast, but it was the decision to smooth out the cuts that made the real difference. The previous rollercoaster, that saw sharp cuts in the first few years followed by a rise in the last, is gone, while the projected date for a surplus has been pushed back another year.

Cuts to departmental spending are expected to average 1.5% a year in real terms in this Parliament, similar to the 1.4% seen in the last. Instead of finding £42 billion in real cuts to public spending by 2018-19, the Government instead only needs £18 billion by 2019-20. This should not only help make it much easier to find long term efficiencies in public spending, but also makes it much easier to find the £9.4 billion the Chancellor needs by the end of the decade to pay for his various tax cuts. The Treasury estimates that further public sector pay restraint will save £5 billion by 2019-20, while the Cabinet Office believes it can find £15 to £20 billion in new efficiency savings by 2019-20.

Alongside the big picture to tax and spend, we also got more details of the Government’s new promised fiscal rule to run a budget surplus in normal times. ‘Normal’ times are to be defined as any time real growth is above 1%, which the OBR estimates has been the case for about a sixth of the time during the past six decades. The rules still contain considerable leeway however. There is no guidance given as to how big the surplus needs to be – a couple of pounds would do it – and no cap on how long the Government gets to return the budget to surplus if a recession does strike. This is certainly tighter than the fiscal targets we have seen over the twenty years, but it still leaves the Chancellor a lot of room for manoeuvre too.

Author

Steve Hughes

Steve Hughes
Head of Economic and Social Policy Read Full Bio

Jonathan Dupont

Jonathan Dupont
Economic & Social Policy Research Fellow Read Full Bio

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