OSBORNE scissors

Greece is a grisly reminder that, when it comes to debt and deficits, nations should travel light.  If they grow the former and run the latter during upturns, these can help wreck a nation when downturns comes.  George Osborne was fortunate enough to inherit a country that, unlike Greece, is not hampered by Euro membership from exporting its way back to prosperity – thanks to that strange band of non-brothers who helped to keep Britain out of it: Sir John Major, Sir James Goldsmith, Gordon Brown, William Hague (who Osborne used to work for), and perhaps above all the Chancellor’s opposite number during the last Parliament, Ed Balls.

Osborne’s period at the Treasury has in most ways been a success to date – after all, he has proved his critics wrong by helping to create the fastest-growing economy in the G7.  But at the centre of it lies a failure.  The Conservative Manifesto of 2010 aimed to eliminate “the bulk of the structural current budget deficit over a Parliament”.  Five years on, it remains the best part of £90 billion – a figure that the Treasury itself concedes is, as a proportion of GDP, one of the highest in the developed world.  Since a Chancellor’s room for manoeuvre is seldom greater than in the first Budget of a Parliament, tomorrow provides Osborne with the best opportunity for getting the deficit down that he is likely to have.

In a perfect world, he would be preparing to take an axe to all growth in departmental spending, or at least seeking future ways of getting government off the hook of ring-fencing – such as an Affordability Commission.  Such a world does not exist.  The biggest ticket items for older people – the NHS and the state pension – are effectively ring-fenced.  This will mean a squeeze on other departments at least as big as that of the last Parliament, perhaps including the single one that really should have its growth in spending protected: defence.  The Chancellor will need to announce a drastic scaleback if he is to achieve his goal of balancing the budget by the end of 2017-2018.

Since he has been merrily pre-briefing much of his Budget, not least on Sunday’s Andrew Marr Show, we know some of the places where that axe will fall – and some of the taxes that will rise.  Working tax credits and housing benefit will be scaled back.  The benefits cap will be tightened, especially outside London.  The BBC will have to stump up for the free TV licences of over-75 year olds.  The Carbon Price Floor and Climate Change Levy will be pruned.  But the first Budget of a Parliament offers a Chancellor not only his best opportunity to slash spending, but also his best chance to carry out major structural reform – as Nigel Lawson did in his great post-election Budget of 1987.

Osborne will doubtless have news about his Northern Powerhouse project – which we anticipated in the Northern Growth Strategy laid out in our own ConservativeHome Manifesto (which also proposed a Balanced Budget Rule).  We also said that, when it comes to tax cuts, the Chancellor should prioritise those that target taxes which “gum up the works”.  We therefore hope that he raises national insurance thresholds – which would provide more effective help to poorer voters than simply raising the income tax threshold – and cuts the top rate further if the Treasury believes that doing so will bring in more revenue.

Corporation tax, business rates – lowering both would help keep growth going.  Given the scale of the deficit, this would be a puzzling time to provide other tax relief.  Raising the 40p and inheritance tax thresholds would be better saved up until an election is nearer and the deficit reduced further.  Elsewhere, there is plenty of restructuring to be getting on with – such as a shift in resources from Universities to apprenticeships (a reduction in student grants may be coming), trade union reform (where a bill certainly is), and a further push for more housing.  We hope for more Garden Towns, community-led planning reform and new pathways to home ownership.

The condition of housing is a emblem of the condition of Britain – one in which older people are, by and large, doing better than younger ones.  The latter own more homes, have ring-fenced public spending for many of their needs, and possess final salary pensions (in a deteriorating number of cases).  Osborne has always been careful to guard his back against accusations that we’re not “all in this together” – announcing crackdowns each year, for example, on tax evasion and “aggressive” tax avoidance.  And he has increasingly tried to fashion an image of White Van George, as Peter Hoskin has pointed out: all those Thea Rogers-orchestrated hard hats and dawn visits to building sites.

“Where is the fairness, we ask, for the shift-worker, leaving home in the dark hours of the early morning, who looks up at the closed blinds of their next door neighbour sleeping off a life on benefits?” he once said.  Quite so – and that picture is characteristic of an operator whose instinct is to draw dividing lines in the political sand.  On the one side, workers; on the other, the workshy.  On the one side, the Conservatives; on the other Labour, the Welfare Party.  On the one side, Friends of George – the allies who now sit around the Cabinet table and in key Ministerial posts.  On the other, potential leadership rivals, social conservatives and some of those who have the temerity to disagree with him.

We wrote on Sunday that the Chancellor, the Prime Minister’s favourite successor to succeed him and in some ways the front-runner, must prove before, after and during the EU referendum that he can being people together as well as revel in conflict.  On Europe, this warrior must help heal a divided party.  Britain’s divisions are less stark and more subtle.  Osborne will signal tomorrow, as he acts for the first time as Chancellor in a Conservative majority Government, what kind of Prime Minister he would be – whether he would ease those divisions by working to ensure that opportunity really is for everyone: whether he has the same finger-tip feel for One Nation as his friend, David Cameron.

Osborne will be right to haul back the growth in the welfare budget.  But at a time when younger people will feel the brunt of spending growth reduction, he must also demonstrate a sense of inter-generational fairness.  That means tax breaks for the living wage and finding ways of creaming off some of the wealth of London’s super-rich – through the non-dom regime and perhaps a new council tax band, as championed by Mark Field on this site.  It also means ensuring that any surprise movement on the top income tax rate is balanced out by reforming pension tax breaks, out of which better-off people do disproportionately well.  Tomorrow will be a testing day for the Chancellor who would be Prime Minister.

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