In the months before the election, when the polls showed that Labour and the Tories were tied, some senior Conservatives appeared oddly relaxed. George Osborne was one of those who seemed certain that the party would return to government. Yet even the Chancellor did not foresee that it would do so alone. Several of the Tory pledges made during the campaign had been designed as negotiating positions. The Liberal Democrats had planned to force the Tories to reduce their proposed level of welfare cuts from £12bn to £9bn-£10bn. Osborne’s decision in the Budget to announce cuts of £9bn over the next two years (with the remainder to follow) was an acceptance of fiscal reality over political fantasy.
The first Conservative-only Budget since Kenneth Clarke’s November 1996 statement was designed to consolidate the Tories’ unexpected advantage. As in his emergency Budget in 2010, Osborne sought to define the terms of economic debate for this parliament. Labour’s introspective leadership contest and the Greece crisis gave him the political space to do so.
His planned Budget surplus law (barring government borrowing in normal economic times) will force Labour to choose between supporting it – and splitting the party – and opposing it at the risk of confirming its profligate reputation. The tighter household benefit cap (cut from £26,000 to £23,000 in London and £20,000 elsewhere) was similarly crafted with the “welfare party” in mind. The speed with which Labour endorsed the measure reflected how Osborne has moved the political centre of gravity to the right. Shadow cabinet ministers told me that they had moral objections to the policy but believe they cannot allow themselves to be outflanked by the Tories again on such an emotive issue.
Rather than merely exploiting Labour’s weaknesses, the Budget addresses those of the Conservatives. From one perspective, the Tories underperformed at the election. They consistently led by around 20 points on the defining issues of the economy and leadership but were rewarded with a majority of just 12 seats. This small margin reflected their enduring reputation as the party of the privileged.
With the Lib Dems no longer competing to take credit for centrist policies, the Conservatives aim to reclaim the mantle of “One Nation” for themselves. Osborne’s Budget continued the coalition tradition of a large increase in the personal allowance and reaffirmed his commitment to exempt anyone working 30 hours a week on the minimum wage from paying income tax.
Yet the absence of Nick Clegg and Danny Alexander from the government front bench also has political costs. Osborne can no longer claim bipartisan support for his most austere measures, nor blame his erstwhile coalition partners for resisting Tory MPs’ demands. Before the Budget, some suggested that Osborne, widely viewed as a future Conservative leadership candidate, would court backbenchers by cutting the top rate of tax from 45p to 40p. But he has wisely avoided this. The view among Tory moderates is that Osborne could only justify the move by demonstrating that a 40p rate would raise more revenue or by coupling it with mass relief from austerity.
The Chancellor could not avoid such a confrontation over tax credits. The large cuts to in-work support were the most politically toxic Budget measure. Tax reductions and the new “National Living Wage” will only partly compensate the losers. Osborne’s chosen path is a reflection of how well the UK as a whole has borne austerity to date. The ease with which he has imposed his cuts is the unacknowledged story of his chancellorship.
Before Osborne declared an “age of austerity”, the political consensus was that public spending must ineluctably rise. The Tories repeatedly lost elections on this issue (prompting them to pledge in 2007 to match Labour’s plans). Between 1950 and 2010, there were just two periods during which expenditure was cut for two years in a row. Osborne has now reduced spending for seven. Because of his decision to allow the automatic stabilisers to operate, which results in higher welfare spending during a downturn, he missed his original deficit reduction targets. But the cuts to public services were larger than first planned. The number of public-sector workers has fallen to its lowest level since records began in 1999, reversing the entire increase under the last Labour government.
Austerity was originally presented as a crash diet to reduce fiscal bloating. Osborne and David Cameron now speak of it as the precursor to a permanent lifestyle change. To facilitate the Chancellor’s quest for an “affordable state” and continual surpluses, spending is intended to remain close to just 36 per cent of GDP (a figure regarded as utopian during the New Labour era). Yet it does not follow that merely because the cuts have not yet resulted in mass outrage, or a critical deterioration in services, this will remain so. Giles Wilkes, Vince Cable’s former special adviser, uses the analogy of a patient who is unharmed by losing 10 per cent of his blood but gradually declines in condition and dies.
Osborne is busily reshaping the state in his own image: fiscally conservative and economically liberal. Public sector pay increases will be capped at 1 per cent for the next four years; working-age benefits will again be frozen; local councils will win the freedom to repeal Sunday trading laws; social housing tenants on above-average incomes will be forced to pay the market rate; the government will no longer pay for free TV licences for the over-75s; Gordon Brown’s beloved redistributive tax credits system is being unravelled.
Osborne may yet fall to earth – but his swagger reflects his belief that, as with Margaret Thatcher’s privatisations, Labour will only return to power by accepting his reforms as part of the common sense of the age.
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