How did we end up with Tory MPs cheering an increase in benefits?

·4-min read

The day after a Budget most of the focus is usually on the small print. Who are the winners and losers? Are the forecasts realistic? But sometimes the real significance doesn’t become clear for months or even years. This is one of those budgets because it contained hugely important signals about the Chancellor’s — and the Government’s — priorities for the future.

To start with, gifted a windfall from the independent Office for Budget Responsibility thanks to much better economic and borrowing forecasts, Rishi Sunak didn’t choose to undo the tax rises he had already announced to pay for the pandemic, the NHS and social care reform. Instead, he decided to add even more to spending on public services like education, the justice system and transport. The result is that spending on public services is set to grow more than three per cent a year over and above inflation over the next three years, while government investment in new infrastructure will be at the highest sustained levels for decades. The age of austerity is truly over.

But even more significantly for a Conservative chancellor, his final rabbit out of the hat was not a tax cut, but an increase in the amount of Universal Credit that working people get to keep as their incomes grow. Effectively a tax cut by another name – worth £1,000 on average – but focused exclusively on working people on lower incomes. The implications for our politics and for millions of working families in London are enormous.

So how did we get to this point? The answer goes back to 2010 and the formation of the Coalition Government in the shadow of the eurozone debt crisis. David Cameron, looking to reassure his nervous party, decided to appoint Iain Duncan Smith, former party leader, as Work and Pensions Secretary.

IDS, as he is universally known in the party, brought with him into government plans for a radical and sweeping reform of the benefits system called Universal Credit, the bare bones of which had been developed by the think tank he founded called the Centre for Social Justice. Many of the underlying ideas had been doing the rounds in various think tanks for some time, shared a common analysis: the benefits system was stunningly complex and often disincentivised people from moving into work or choosing to work more hours. Most significantly, when people moved off welfare and into work, they were transferred to an entirely new system which often reduced their incomes and eliminated their eligibility for various additional parts of the system that they had accumulated over the years. Universal Credit would solve that problem by wrapping all the different benefits into one and creating a single taper – the rate at which your benefits would be reduced as you earned more.

Proper disclosure: as an adviser to the Coalition Government, I was part of the team that developed Universal Credit. Indeed, I played a role in saving it. The senior politicians were understandably concerned about the huge number of winners and losers that would be created by moving people off the old system onto the new system. But over the course of a few days a small group of us developed the idea of “transitional protection”, whereby people would never lose money when they moved onto UC, and the idea was resuscitated.

Since then, Universal Credit has had a bumpy and long delayed birth – perhaps inevitably for such a radical reform. It has also been the centre of a recent storm over the Government’s determination to ensure the temporary uplift introduced during the pandemic did indeed remain temporary. But the basic principle remains, and the evidence suggests that it has been successful in incentivising work. Perhaps as important though is a crucial side effect: the Conservative Party now feels a significant degree of ownership of the way the new benefit system works, and in particular the way it encourages people to work and increase their incomes.

Rishi Sunak was fairly explicit yesterday about his hope that the OBR will give him further upgrades to his forecasts in the years ahead, allowing him space to cut taxes before the next election. Conservative Chancellors have traditionally campaigned on higher income tax personal allowances or lower income tax rates. The significance of yesterday’s Budget is that they may now choose to campaign on helping the incomes of lower income working families through Universal Credit.

Rupert Harrison is a former chair of the Council of Economic Advisers and a multi-asset portfolio manager at BlackRock

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