Demos Responds to the Summer Budget

The Chancellor’s Summer Budget was billed as bold and delivered on the promise. It marks a clear break with the Coalition and New Labour before it.

The Living Wage will dominate the headlines. It is designed as a companion to tax cuts for business and as an alternative approach to tax credits. However, the devil be in the detail. For example, the living wage currently assumes that people receive tax credits, which the Budget also signalled would be cut.

It will also be important to preserve – or perhaps repair – the social partnership model of the Low Pay Commission. The LPC was designed to bring employers and unions together to share power and reach consensus based on the best available evidence. That model needs to be protected.

The welfare reforms are substantial. As Demos has previously argued, there is a good case for equalising ESA and JSA. The move can improve incentives to work and reduce stigma around disability benefits. However, this should be a reform rather than a cut. Money saved from the change should be directed into the Personal Independence Payment (PIP), which helps disabled people cover extra living costs.

As with previous Budgets, older generations are protected at the expense of others. There is no escaping that a £12 billion cut to working age entitlements will be painful, even if spread over a longer time frame. Part of the rationale for this is political. Commentators frequently cite the ‘grey vote’ but our research shows that young people often regard older generations as more deserving too.

Despite this, it remains to be seen how the measures focused on young people will work, and what other investments will be needed. For example, for ‘Earn or Learn’ to work in practice, it will need to be supported by services of sufficient quality to help people find and access work.

Devolution will be one part of the answer, with the Northern Powerhouse’s frontrunner, Manchester, acquiring new power over employment services, among other things. Done properly, this could be an opportunity to get welfare and skills services working much more closely together. The Chancellor has clearly identified decentralisation as a key goal for this Parliament. To that end, there will be a more assertive approach from Whitehall: cities will acquire new powers, but only if they follow the Northern Powerhouse model.

Apprenticeships are another piece in the puzzle for young people. The apprenticeships levy, which looks to share the responsibility for skills development with employers, is important. It answers the question of how the Government plans to meet its target for three million apprenticeships in this Parliament, at a time when public spending is tight more employers need to be enlisted.

On tax, the two new forms of tax hypothecation will be greeted warmly by the public, but less so by the Treasury which prefers to retain flexibility over spending. Increasing the income tax threshold is another policy that will poll well. It is not as well targeted at low earners as often suggested, but nevertheless is now established as a Conservative policy, not just a coalition compromise. Changes to inheritance tax are the wrong priority at the wrong time. As Demos has argued, a better move would have been to reform inheritance tax, so that individuals are taxed on what they receive, not what they leave behind.

All in all, this is a radical Budget, which could set the terms of debate for the rest of the Parliament.