The U-turn that wasn’t

George Osborne’s headline-grabbing U-turn on tax credits wasn’t really a U-turn at all. To stretch the analogy, he put the indicator on to make it look as if he was going to pull a u-ey but then he just slowed down and kept going in the same direction.

The clever folk at the Resolution Foundation spotted this within minutes:

By scrapping tax credits but moving people onto universal credit, the overall effect by the end of the decade is pretty much the same.

Screen Shot 2015-11-27 at 09.05.31As the IFS said, “the reversal of tax credit cuts makes no difference in long run.” The government still plans to cut in-work benefits but not just yet.

In the short-term, therefore, those on low incomes get a reprieve.

Screen Shot 2015-11-27 at 07.56.09

By the end of the decade, though, they are more-or-less where they would have been under the original plan.

Screen Shot 2015-11-27 at 07.56.58

Of course, the chancellor couldn’t possibly have U-turned on cuts to in-work benefits minutes after he had promised that his £12 billion welfare cuts would be “delivered in full“. With most of the other big chunks of benefit spending already off limits it would have been arithmetically impossible.

The social security cuts are even more important now that the chancellor has eased up on cuts to public services. As the OBR’s report shows, welfare forms a much bigger proportion of the planned spending reduction than it did in the last parliament.

Screen Shot 2015-11-25 at 16.43.50

I still can’t see it happening though. Taking £12 billion off the welfare bill, even allowing for pay increases later in the decade, still looks like a tall order. As Matt Whitaker noted, the OBR has slightly downgraded its forecasts for household income and average wage growth since the last budget.

Screen Shot 2015-11-27 at 10.20.22

Screen Shot 2015-11-27 at 10.17.29

Even if the National Living Wage boosts incomes for the lowest paid it will be nowhere near enough to offset the benefit cuts.

Cutting £12 billion from welfare will be difficult to do without causing considerable distress to millions of people. At best this will be politically damaging, at worst it could lead to serious social unrest.

But if the government can’t make its welfare savings and it is only taking £10 billion off public service spending, how will it meet its deficit target?

I suspect this is where the real U-turn will occur. More crafty tax increases, some of them outsourced to local government and the new devolved authorities, together with some blarney about why welfare costs didn’t come down, probably blaming employers for not stepping up. If the chancellor has ruled out extra borrowing, is cutting less from public services and then finds he can’t cut welfare, the only option left is to increase tax. For all the hullabaloo, Wednesday’s U-turn wasn’t really a U-turn at all. The tax U-turn will be slower and a lot quieter. More like one of those long gentle bends in the road that you don’t even realise has taken you in a different direction.

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7 Responses to The U-turn that wasn’t

  1. Pingback: The U-turn that wasn’t | Flip Chart Fairy Tales | sdbast

  2. Truth to Power says:

    But that was clear from his speach … wasn’t it?

    • P Hearn says:

      Exactly. He stated it very clearly, and that’s what made it politically digestible as a u-turn.

      With UC, the idea is that extra work pays. Some people doing only16 hours a week due to the current artificial perverse incentives in the system will have to consider working more than one day per week in a year or so.

  3. Wonky says:

    So presumably the cuts will still kick in next April for people in areas with Universal Credit? With transitional protection for those moving from TCs to UC later on, that’s potentially a huge difference in entitlement based on a postcode lottery, isn’t it?

  4. Pingback: Osborne kicks the can down the road (again) | English Economic

  5. Pingback: Dull magic and imaginary numbers | English Economic

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