Osborne hails ‘progressive budget’ but does it stack up?

Everyone knows the government faced some terribly difficult decisions, but the Budget’s impact is likely to place tremendous strain on the demand for the services of charities and community groups. For all the talk of ‘fairness’ in George Osborne’s first budget, an initial assessment appears likely to hit poor people very hard. Raising VAT, rather than raising income tax, is deeply regressive and disproportionately affects poorer households. The three-year freeze on Child Benefit, will affect lots of poor families – and let’s not forget that around 1 in 4 children in the UK live in poverty.

The Chancellor offered assurances that the richest would pay proportionally more than the poorest but there are some major caveats to this claim. At face value, the measures put in place to protect the vulnerable, such as raising the threshold for income tax allowance and £2bn in tax credits for the poorest families, will insulate the poor households from other cuts. However some of the measures announced will not come into effect (or be known) for some time, such as cutting the benefits bill. Cuts of 25% for government departments, will mean huge reductions in public services, which will most affect poor people who rely on these services. Analysts, including the Institute for Fiscal Studies, have questioned the Chancellor’s assertion that the most vulnerable will be protected, even without being able to fully assess the impact of the departmental cuts. It’s also worth pointing out that 25% is an average across Whitehall and if the cuts announced last month are anything to go by, the figure could be far higher for some key frontline services. Communities and Local Government has had to reduce its budget this year by 17% already.

There’s been a lot of talk about satisfying the markets with this budget and George Osborne deserves some credit for that. The risk of the UK’s credit rating being downgraded is very real and the cost would be enormous. You only have to look at Greece, which effectively now has its national debt on a credit card, with the rate of interest it’s now paying. The rallying response of the bond markets and generally positive response of financiers is good news, as the already bleak picture could become far worse if the markets were less positive.

The levy on banks is welcome, insofar as it goes. The bank tax, which the Chancellor (quite rightly!) described in terms of the banks compensating us for the risks they have (and continue to) pose is expected to raise £2bn per year. That may sound like a lot, but it’s the same amount that last years’ tax on bankers’ bonuses generated. If the levy is intended to be proportionate to the banking sector’s size, then it’s surely far too little. How can a tax on the entire banking sector only be the same size as taxing its top paid staff? £2bn represents less than 1% of the amount spent bailing out the banks. And with the reduction in corporation tax, won’t they recoup some of this anyway?

Commentators and analysts had suggested we might expect a levy of around £3bn, and the rise in the share price of the largest banks suggests they’ve got off more cheaply than they anticipated. There was nothing in the Budget about a ‘social responsibility levy’ which was in the coalition agreement, but let’s hope this has not been kicked into the long grass.

Although we cannot make a conclusive judgment yet on how the cuts will affect the poorest households, as we’ll have to wait for the detail of the Spending Review on 20th October. Nonetheless, the evidence so far, the statement that ‘we’re all in this together’ does seem to be questionable.

Toby Blume

Chief Executive

Urban Forum

E-Mail: toby@urbanforum.org.uk  Web: www.urbanforum.org.uk

Tel: 020 7253 4816                     Fax: 020 7253 4817

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