2015 Budget - Winners Curse


Nobody predicted the Conservatives would get a majority in the 2015 general election (except perhaps a few die hard Tories) not even the authors of the Conservative Manifesto. Accordingly, certain items were included which it was believed would be negotiated away by their coalition partners as in 2010 by the Liberal Democrats. Consequently, items were included which were aggressive, challenging and, many would say, impossible to deliver. Last week’s budget demonstrated this perfectly as George Osborne had to try and deliver on these promises and his attempts to do so, and the resulting fall out, resulted in possibly his worst week in office.

There were three main promises in that manifesto that caused Mr Osborne particular problems last week. First of all, he promised to deliver a budget surplus by the end of this parliament. This is a self-imposed target but one which helped give him and his party much more economic credibility that their opponents. With growth projected to be slower than originally thought (even in last year’s Autumn statement) he had to engage in all sorts of trickery to get to his target including deferring the introduction of the revised corporation tax payment dates for large companies. Whilst this appears counterintuitive in that you would payments to be made as soon as possible to maximise cash receipts, there is actually a one off cash bonus in the year of introduction of around £3.4bn. By delaying its introduction to 2019/20 this one off ‘bonus’ is credited to that year – the year he needs to demonstrate a surplus. (Never play ‘find the lady’ with Mr Osborne!) This first objective gives rise to his second problem - £12bn of unidentified welfare cuts stated in the manifesto. The welfare budget has been hit hard since 2010 principally due to its unique status of being the only three digit budget cost that has not been ringfenced. Further to this, the biggest cost within welfare is pensions which have been ‘triple locked’ and whose recipients are also the largest category of voter turnouts – not a politically clever place to seek savings. Thus the remainder of the welfare budget has been continually eroded. The final straw for Welfare Secretary Ian Duncan-Smith was the reduction in the budget of £1.1bn of PIP payments for the disabled through a new qualification system. Regardless of the merits of these proposed changes, the inclusion in the budget of this change was required in order to make the numbers add up (despite it being such a paltry amount in terms of the overall budget). The consequent political fall out made Mr Osborne, and the Conservative party in general, risk falling back into their perceived status of supporters of the rich (especially when CGT rates were cut in the same budget). It appears politically naïve to include such an emotive policy, when he had to make a u-turn last year with working tax credits, but was required due to the manifesto commitment.

The final policy, and problem that has been the curse of Conservative leaders for the last forty years, was the commitment to hold a referendum on UK’s membership of the EU. Mr Cameron, forced into this by the rise of UKIP, probably felt a commitment to hold a referendum only if the Conservatives achieved a majority would never arise. It has. The political ramifications for the Tories have been on full view since the election taking them from a majority party facing an unelectable opposition to a fractured party trying to hold everything together. Ironically UKIP are currently even more fractured that the Tories! However, there are also economic consequences to this decision. The Prime Minister and The Chancellor, being in the remain camp, do not want to upset their already nervous Eurosceptic backbenchers and core voters by introducing any policies that may financially harm them. This meant that Mr Osborne could not continue his admirable pensions reform. He has already transformed an out of date system by introducing much needed flexibility and the introduction of further reforms in the form of either a pensions ISA or flat rate deduction would continue to move forward and give rise to positive effects. It would raise much needed cash for the Exchequer, thereby obviating the need for further welfare cuts and would go some way towards reducing inequality. The current pension deduction system benefits higher rate tax payers whereas a flat rate scheme would be much more progressive benefiting lower rate taxpayers. Pensions reform was meant to be his legacy but its replacement to balance the books could be his swan song.

It would therefore appear as though the promises made in the election manifesto on the assumption they would never have to be enacted, have now become shackles around the ankles of the Conservative Party, and the Chancellor in particular. No one wants to lose but sometimes winning can be a curse.

Nobody predicted the Conservatives would get a majority in the 2015 general election (except perhaps a few die hard Tories) not even the authors of the Conservative Manifesto. Accordingly, certain items were included which it was believed would be negotiated away by their coalition partners as in 2010 by the Liberal Democrats. Consequently, items were included which were aggressive, challenging and, many would say, impossible to deliver. Last week’s budget demonstrated this perfectly as George Osborne had to try and deliver on these promises and his attempts to do so, and the resulting fall out, resulted in possibly his worst week in office.


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