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Observations on the Budget (1). By Donald
Hirsch
One of the oddest things about two terms of new Labour is the reversal of the
old rule that when it comes to spending, elections over-pledge and
chancellors under-deliver. In the parallel universes of Blair election
rhetoric and Brown Budget Day practice, the contrast is between lack of
commitment in the former and scale of ambition in the latter. Labour's first
pledge card was a model of restraint: it wavered between the highly selective
(limits on class sizes for infant schools formed the education pledge) and
the unspecific (cut hospital waiting lists, but not by a set amount).
The 2005 version has degenerated into pure slogans: "Your family better
off . . ." Gordon Brown didn't have a pledge card when he started as
chancellor in 1997, but we can imagine what one might have said if he had.
The main themes of his nine Budgets and four public spending reviews have
remained remarkably stable.
After a short period fulfilling a pledge to worried Middle England to keep
initially to Tory spending plans, the story has stayed the same for seven
years, since Brown's first redistributive Budget and his first expansionary
spending review, both in 1998. If he had then made the following five pledges,
he could now congratulate himself on handsome delivery:
Steeply raise health spending. That is up to about 8.6 per cent of GDP
from just below 7 per cent. That's more than it sounds: not only is the
proportion of national income spent on healthcare up by a quarter, the
economy itself has grown by nearly a quarter in real terms. We are now up to
roughly the OECD average in health spending.
Substantially raise education spending. Here, the increase is more
modest: from 4.8 per cent to 5.5 per cent of GDP, notwithstanding the
Chancellor's ostentatious handouts directly to schools over the heads of
local authorities, extended in this Budget. Still, the proportion of national
income spent on education has gone up by one seventh. We are closer to but still
below the OECD average.
Steeply raise poor children's relative incomes. Brown has increased
tax credits for the working poor while raising out-of-work benefits. So work
incentives rise as child poverty falls. A single mother with two young
children will get 73 per cent more by way of out-of-work benefits than in
1997, while median incomes for the whole population have gone up 50 per cent
and prices 22 per cent. The result is that some of the poorest families have
had their real incomes grow more than 40 per cent, nearly twice as fast as
the average household. This is in stunning contrast to the previous 18 years,
when those on benefits were left progressively further behind by rising
general prosperity.
Substantially raise poor pensioners' relative incomes. Their minimum
income guarantee is up 30 per cent in real terms, a more modest increase than
for children, but still ahead of average income rises. For the first time in
20 years, pensioners have a basic benefit, albeit means-tested, that at least
keeps pace with earnings.
Gently squeeze the rich. Despite no rises in headline rates, income
tax takes larger fractions of the incomes of the better- off. This is because
tax thresholds and allowances have risen only with prices, but people are
earning more in real terms. In this Budget, the Chancellor made a virtue of
how tax credits paid directly to low- and middle-income families give them
much more than spending the same money on raising the tax-free allowance. But
for the better-off, not raising the threshold for paying higher-rate tax in
line with earnings represents a straight loss.
Someone on £30,000 in 1997 was just below the higher-rate threshold. If that
person's wages had risen in line with average income growth, he or she would
now be on £45,000 a year - and paying £3,000 in higher-rate tax. This is the
equivalent of raising the basic tax rate from 22p to 26p for higher earners.
The effect is dramatic. In 1988, Nigel Lawson cut the higher rate of tax from
60 to 40 per cent. Yet because his successors from both parties have adjusted
thresholds in line with rising prices, not rising incomes, the rich now
shoulder more of the tax bill than before the change. The highest-earning 10
per cent of taxpayers contribute more than half of all income tax, compared
to under 40 per cent just before the Lawson tax cut.
So what are the big shortfalls in the Brown record - other than the still
uncertain issue of whether his fiscal rules will eventually collapse like a
house of cards?
First, while favoured groups among the poor have finally got a share in
economic growth, less favoured groups fall ever further behind. The basic
income support rate from next month is a mere £56 a week, only £7 more than
in 1997, with this Budget's increase a shabby 55p. If you are not a pensioner
and you have no children, it is assumed that your living requirements are the
same as a generation ago.
Second, the non-means-tested basic state pension (as opposed to the minimum
income guarantee) has continued to fall behind, rising by 31 per cent between
1997 and 2005, compared to the 50 per cent rise in average incomes. To avoid
severe poverty, many pensioners have to claim through a means test. Because
they find the whole idea humiliating, some don't do so.
The third shortfall again affects older people and deals them a double blow.
This is the failure to fund local government properly. The double whammy for
pensioners is that they are hit hard by rising council tax, and also affected
by declining social services on which many rely.
This year's generous £200 council tax refund to pensioners helps a lot in the
short term, but its recipients would prefer decent pensions and reasonable
council taxes to having always to rely on Brown's ad hoc largesse. The
arbitrary effect of the Chancellor's whims was well illustrated in this
Budget. In December's pre-Budget report, Brown announced that the refund
would be cut from £100 to £50. In the Budget itself, he announced it would go
up to £200, and cheekily called this a £150 rise. The winter fuel allowance
and council tax refund combined are now worth 10 per cent of a year's basic
retirement pension, and the notional £150 increase in the refund in this
Budget exceeds the £128 rise in the pension itself.
Research on older people's attitudes shows it isn't just hard cash that
affects their sense of well-being. Avoiding the anxiety, complication and
stigma of a means test; feeling valued through the payment of a decent,
guaranteed basic pension; access to supportive and well-resourced local
services - all of these things make a difference.
So if Brown embarks on another stint at No 11 on 6 May, what should be his
next pledge? "A decent pension for everyone, without having to plead
poverty," would do nicely.
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