Money

How bold will Osborne dare to be on Wednesday?

The UK’s leading economic thinkers believe that the Chancellor should slaughter some sacred cows in the Budget, as Felicity Hannah reports

Some want the Chancellor to change course or go in harder (Getty)

His plans to balance the books have already come under fire and he has been forced to rule out a tax raid on pensions. But what other announcements might George Osborne make in his Budget on Wednesday? We have asked researchers and economists what George should do next, and the responses are remarkable.

Make pensioners pay for social care

Recent Budget statements have been kind to pensioners, but Andrew Harrop at left-wing think-tank the Fabian Society thinks it’s time they were asked to pay more in.

“The Chancellor should levy national insurance on working pensioners and ring-fence the revenue for social care,” he says. “Without more money, care for older people is on the brink. After years of underfunding, the number receiving services has plummeted and care-home operators are facing financial crisis. The national living wage just piles on the pressure.

“But older people should pay for better care themselves. Compared with younger generations, they have suffered far less from the financial crisis and the austerity cuts. And as things stand, pensioner households pay less tax than younger families with the same living standards.

He adds: “Today, employed and self-employed pensioners are exempt from national insurance contributions {Nics], at a cost of around £1bn to the exchequer. The rationale for this has always been that older people have already earned their pension. But now, with the services they’ll need in late old age in crisis, and younger generations unable to pay, it’s time to treat working pensioners like everyone else. This is a ‘something for something’ deal.”

Phase out housing benefit

Some argue that in the long term changing some welfare payments would benefit the least well off. Ben Southwood at free market think- tank the Adam Smith Institute thinks it’s time for a drastic change in policy: “Housing benefit should be phased out and eventually scrapped. In a property market where supply is tightly constrained, increases in the benefit go mainly into higher rents. The empirical evidence suggests that about 70p of every £1 of the £26bn system goes into the pockets of landlords in the form of higher rents.

He adds: “What’s more, the system encourages people with less means to move to the most expensive areas, since the level of payment is tied to prevailing rents, which means that the bill is artificially inflated.

“The Government should use the money to supplement low incomes, by raising the employee Nic threshold and making Universal Credit withdrawal rate less steep so work pays more for recipients.”

Invest, don’t cut

Mr Osborne has stated that further spending cuts will be necessary if he is to meet his pledge to balance the books by the end of this parliament. However, plenty of economists argue that this is the wrong tactic. Catherine Colebrook is senior economist at the Institute for Public Policy Research. She argues: “With the economic context gloomy, the Chancellor will be tempted to focus on sticking to his deficit-reduction plans. But this brings with it a huge opportunity cost: a chance to make a real difference to people’s lives is missed.

“The Government’s borrowing costs are still touching historic lows. This should be seen for the opportunity it is: investment in infrastructure will never be cheaper, and improving our roads, our rail services, our energy infrastructure and our broadband speeds would help kickstart our stalling productivity growth.

“The Chancellor could also make investments of a less conventional kind. He could reform regressive policies on saving – increasing incentives for poor and middle-income households to save – while reducing unnecessary tax breaks for richer people’s savings. He could extend free childcare to more families, particularly those not currently in work. And he could resist the temptation to save money by making stealthy cuts to welfare, and instead look to target wasteful perks such as the winter fuel allowance, which richer pensioners simply don’t need.”

Cut further, harder, now

While some people have responded to the promise of further cuts with dismay and concern, others want deeper reductions and in different areas. Tim Focas at the City think-tank Colloquium argues: “At some point, sooner rather than later, putting a stop to departmental spending protections and unfunded tax cuts will not be an economic option for George Osborne.

“Take the income tax allowance,” he adds. “It has resulted in a bill to the Treasury of as much as £12bn as he has brought as many as 3 million people out of paying tax on the first £10,000 they earn. While it is hard to criticise in principle, the hard truth is that this a policy the country cannot afford.

“Unfunded tax cuts are one thing; ring-fencing some elements of spending is another. Education and health are still immune from cuts, despite accounting for more than a third of public spending. The NHS takes a whopping £138bn and education receives around £90bn... Protecting health and education may be popular, but it is economically questionable.

“The Government is still spending £130bn a year more than it receives in tax. This gaping hole needs to be filled if the budget is ever going to be balanced.”