Osborne hopes minimum wage increase will soften blow of welfare cuts

In a move that went further than Labour was planning at the general election, the chancellor said employers would be forced to pay staff a minimum of £7.20 an hour from next April and raise wages by 6 per cent a year on average to around £9 an hour by the end of the parliament, The Guardian reports.

Relishing the freedom to deliver his latest budget unfettered by coalition, the chancellor eased up on the pace of deficit reduction and reduced the size of the cuts that Whitehall departments will face in the coming years.

On the assumption that the economy grows steadily at around 2.5 per cent a year, the Treasury is now expecting a £10bn surplus in the final year of the parliament – a sizeable war chest for the 2020 election. The improvement in public finances will come partly through a tougher tax regime for buy-to-let landlords, restricting non-dom tax status and by increased dividend taxation.

Declaring “Britain needs a pay rise” – once the campaign slogan of the TUC – Osborne said he was directly boosting the national minimum wage of 2.7 million workers aged over 25. The increase, accompanied by substantial welfare cuts over three years, was designed to engineer a rebalancing between the individual and the state – a political intervention to shift responsibility for low incomes from the state to employers.

“Let me be clear: Britain deserves a pay rise and Britain is getting a pay rise,” Osborne said, adding that 6 million people would see their pay increase as a result of what he dubbed the creation of a national living wage.

The announcement was greeted by the work and pensions secretary, Iain Duncan Smith, punching the air in triumph, but the shadow chancellor, Chris Leslie, said: “This minimum wage increase is just a rebrand of the minimum wage – trying to call it something different. It doesn’t actually compensate in any way for this massive take away from tax credits. The changes amount to a work penalty that he has introduced into the tax credit system. It hit very, very hard.”

Osborne had considered a rise in the minimum wage in 2013 but could not win the support of the Liberal Democrats for the welfare cuts, or a further cut in corporation tax, an essential part of Wednesday’s package designed to ease employers’ resistance to the reforms.

But despite being given the sweetener of a cut in corporation tax from 20 per cent to 18 per cent by 2020, the CBI said the increases would prove “challenging” for its members working in the hospitality and retail sector.

Charities said that for many families the impact of the national living wage would be swamped by the changes to tax credits and housing benefit, warning that there would be a rise in poverty and inequality over the coming years.

The Resolution Foundation thinktank estimated that although some middle-earners would be net gainers, the changes would leave low-earners – typically on £9.35 an hour – worse off by between £850 and £1,000 a year.

Resolution chief executive Gavin Kelly said: “By concentrating £12bn of cuts from a limited range of working-age benefits, the chancellor has focused a disproportionate part of that pain on the working poor.

“We shouldn’t think that a higher minimum wage will compensate all low-income working families for their losses – many working households will be left significantly worse off.”

Frances O’Grady, the TUC general secretary, said: “The chancellor is giving with one hand and taking away with the other. Massive cuts in support for working people will hit families with children hardest.

“The chancellor has finally woken up to the fact that Britain needs a pay rise. The TUC has long campaigned for the minimum wage to rise faster and the chancellor has listened to us at last.”

The budget announced an increase in the personal allowance to £11,000 and a small rise in the 40 per cent tax threshold from 2016, but the independent Office for Budget Responsibility said tax increases, including a jump in insurance premium tax and less generous tax relief on pension contributions, would raise twice as much as the chancellor gave away.

Stressing that it was a budget for working people, Osborne wooed motorists by freezing fuel duty and by cutting vehicle excise duty on most cars.

The overall scale of the budget, which ringfenced defence spending, announced a training levy and gave more powers to elected mayors, left Osborne as the leading intellectual force in the cabinet and in prime position to succeed David Cameron later in the parliament.

The chancellor drew jeers from largely shell-shocked Labour MPs when he warned “the benefits system should not support lifestyles and rents that are not available to the taxpayers who pay for that system”.

The big cuts to welfare come from:

  • freezing working age benefits and tax credits for four years as opposed to the two set out ahead of the election.
  • limiting the child element of tax credits to the first two children for new claimants. At present nearly 850,000 tax credit recipients have more than two children.
  • reducing the income thresholds in tax credits from £6,420 to £3,850 and work allowances in Universal Credit

The OBR said the reforms would have a negligible effect on the jobs market.

The announcement that defence spending will remain at the Nato target of 2 per cent of the UK’s GDP target leaves other non-protected departments facing cuts that will probably exceed 15 per cent over the next three years.