by GK Strategy 8th July, 2015
3 min read

A New Political Economy

George Osborne’s moves on income tax and tax credits are not only some of the boldest changes to tax and spending in recent years but also a signal of a move to a new form of political economy in the UK and a stark break from New Labour’s attempts to solve material and social inequality.

In terms of its ultimate aim, the tax credit system had indeed performed poorly.  At first an administrative nightmare, eventually it at best managed and at worst perpetuated income inequalities that arguably dent UK productivity and overall economic performance.  The root causes of what Labour saw as an economic failure were never investigated, let alone addressed.

Osborne has sought to overturn this and end the merry-go-round of cash moving from lower earners to other lower earners via the tax system.  The ramifications of doing this are, however, very unclear.  Osborne will be hoping that this will encourage individuals to seek more work and firms to pay better.  Whether the UK’s labour market dynamics will permit this is debatable.

In any case, such an adjustment would take time and in the meantime reducing the spending power of large swathes of the population will have an impact.  Whether this will affect housing, leisure, pubs, supermarkets or the high street the most remains to be seen.

While the ‘cost of living crisis’ identified by Ed Miliband some years ago may well have been ineffective politics, it was a notion grounded in reality.  If and how Osborne attempts to counter the charge that he is simply exacerbating this situation will be very instructive for the approach this government will take and how a putative Osborne led administration in 2018 or 19 might look like.  It may mark the eventual withering away of the welfare state, which has been longed for by many Conservatives, but which was solidly opposed by the Liberal Democrats under the Coalition.

In the meantime, there will be a profound impact on some groups.  Think tanks have already been crunching the numbers and despite increases in the tax-free allowance and the minimum wage, low-income earners with children will suffer far greater cuts in their tax credit awards.  Others will lose out through the freezing of a range of welfare payments.

The conversion of the minimum wage into a living wage of £9 per hour by 2020 is unlikely to remedy these economic and political problems but it is a start.  What it will do, together with the raft of other policies announced, is act as a disincentive for families to have more than two children; a rather unprecedented step in the recent history of the UK’s welfare state.

Osborne’s mantra of moving to a high wage, low tax, low welfare economy borders on being revolutionary.  He will encounter some serious practical obstacles on the way, not least the never-ending delays to the government’s Universal Credit welfare reform programme but he has certainly been using the policy levers at his disposal to achieve the latter two of his goals.  Whether the first transpires is dependent upon a number of factors out of his control but which the government has some influence.  It’s a risky road to follow but if the signs of success are apparent in two years’ time, the odds on Osborne being the next Prime Minister will have shortened considerably.

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