A budget for our next Prime Minister

There is a simple way to read George Osborne’s budgets. Forget the economics, and just think politics.

Take the macroeconomics of aggregate fiscal policy, for example. Many pages have been filled (in some cases by me) about the folly of fiscal austerity while interest rates are near their lower bound. Under the coalition I calculated (with the OBR’s help) that this policy cost the average household the equivalent of at least £4,000 over the last five years. The arguments put forward to support this misguided policy have changed, but they seem to get worse rather than better: I go through the latest in this short piece for today’s Independent. But the focus on the deficit helped Osborne win the last election (admittedly with the help of Labour’s reluctance to challenge what he said), and is on course to lead to a radical reduction in the size of the UK state, as Colin Talbot sets out here.

How about his bold move of a substantial increase in the minimum wage? At first sight it seems very strange: it is a policy that if introduced by Labour would have much of the press, and most economic journalists, screaming about unnecessary interference with the market and the onset of socialism. Until now the level of the minimum wage has been carefully calculated by the Low Pay Commission to avoid significant job losses. The OBR calculate that Osborne’s proposed hike will lose about 60,000 people their jobs. But as Tim Harford explains, it is not as if Osborne has an alternative economic view. He just needed a dramatic move to give him political cover for his large cuts in tax credits.

Most of those on low earnings will still be worse off - by a lot in some cases, often decreasing work incentives - but he knows from the last election that impressions are more significant than numbers. [1] Probably the most important impact of this budget will be to raise poverty, particularly child poverty. The previous coalition’s policy changes also increased poverty, but their impact on the official statistics was offset by the overall decline in real wages. Over the next five years that will no longer happen, so again the cover is being put in place: change the definition of poverty. The economics is ludicrous, but we should have got used to that by now.

Then there is inheritance tax. It is not often I agree with Janan Ganesh, but he is correct when he wrote just before the budget:

 “George Osborne wants to refurbish the Conservatives as the natural habitation for working people … But the message will always be muffled as long as the tax system favours assets, including those bequeathed, over earned income … the greatest perversity of the system survives and will only worsen if the threshold for inheritance tax is lifted this week.”

But this year, and probably for the next one or two, George Osborne has a more important political goal in mind than confining Labour to opposition (particularly when they are doing just fine without his help). He wants to be sure that when David Cameron steps down, as he has promised to do, it will be George Osborne who is seen as the natural successor. Most of the Conservative base is not devoted to the cause of free markets, but is passionate about their own families’ income and wealth. It also likes high defence spending, so the budget contained a commitment to keep to the 2% Nato target. For those who hope for measures to tackle what Chris Dillow calls the true ‘something for nothing’ culture, the UK housing market, I suspect that too will not happen before the Conservative Party have elected their new leader (if it happens at all).    

If this sounds too cynical to you, all I can say is that I learn from experience. When I wrote this three years ago, Paul Krugman no less said I was getting “remarkably cynical”. Unfortunately, save for one detail, my cynicism proved pretty accurate. When it comes to implementing good (evidence based) economic policy, in both the UK and the rest of Europe, we are living through very depressing times.

[1] Postscript: the reaction of the UK press is outlined here