George Osborne has warned that he will continue to take “difficult decisions” after he embarked on a spectacular U-turn on his planned tax credits cuts and to spare frontline policing from severe austerity.
The chancellor said he would continue to cut day-to-day government spending and the welfare budget as he seeks to adopt an “inherently cautious approach” to deliver an overall budget surplus of £10.1bn by 2019-20.
Speaking on the Today programme on BBC Radio 4, after unveiling his spending review on Wednesday, the chancellor said that he had listened to critics after he abandoned altogether his plans to cut £4.4bn from tax credits.
But Osborne declined to apologise or to admit that he had made a mistake after he outlined the cuts in his July budget as part of his plan to deliver £12bn in welfare savings. Osborne will still deliver that overall level of cuts but will use £27bn of fiscal wriggle-room gifted by the Office for Budget Reponsibility’s more benign forecast for tax receipts.
Asked by the Today presenter Nick Robinson whether he was admitting he had made a mistake and was apologising or whether he had simply been forced to change tack by critics, the chancellor said that his “central judgment” to move to a lower welfare and higher wage economy was the right one.
“We are moving in the right direction and we are making billions of pounds of savings in the welfare budget. But people raised concerns with me that the speed of getting there was too quick, that we weren’t doing enough to help families in the transition. And because the public finances had improved a little I could use some of that improvement to smooth the transition to that lower welfare economy. So we are heading in the same direction, we are just taking an easier path to it.”
But Osborne made clear that he was not abandoning his overall approach, which is to eliminate the structural budget deficit two years before the 2020 election and to deliver an overall budget surplus of £10.1bn a year before the election.
The chancellor said: “It is not an end to the difficult decisions, that spending review. There are going to be difficult choices for different governments departments. Billions of pounds of savings, billions of pounds of savings in the welfare budget as well. This spending review sets out what Britain needs to do to stop borrowing, run a surplus, pay down our debt. It takes those difficult decisions in day-to-day spending so we can invest in the long term.” The chancellor added that there was “light at the end of the tunnel”.
In his central political decision of the spending review, Osborne caused delight among campaigners and Tory MPs by saying he was not going to phase in the controversial planned £4.4bn cuts to tax credit cuts, but abandon them altogether.
The chancellor said in his speech on Wednesday: “Because I’ve been able to announce today an improvement in the public finances, the simplest thing to do is not to phase these changes in, but to avoid them altogether.”
However, cuts to universal credit – the benefit set to replace tax credits for most claimants in the last years of the parliament – are to go ahead. About 140,000 people currently receive universal credit.
The cut to work allowances in universal credit were announced in the summer budget and will, according to specialist thinktanks, still leave about 3m households about £1,000 a year worse off on average by 2020 than if tax credits had remained at their current levels.
The Resolution Foundation welcomed the change to tax credits, but said it was pain delayed rather than abandoned. A single parent with one child, working part-time on the national living wage, making a new universal credit claim, would lose £2,800 by 2020, the thinktank said.
According to an analysis by Liverpool Economics for the Guardian, the losses will come sooner for those already on universal credit. A working single parent with two children will be £2,600 worse off by April 2016.
Osborne’s U-turn means he faces the political embarrassment of needing to go to the Commons to seek permission to breach his self-imposed welfare cap for three years from 2016.
Overall, he described the spending review as the work of “the mainstream representatives of the working people of Britain”.
John McDonnell, the shadow chancellor, claimed Osborne’s change of heart on both issues as a “victory for Labour”, but also dismayed some Labour MPs by tossing a copy of Chairman Mao’s Little Red Book at the chancellor in a bid to illustrate that the Treasury was flogging off state assets to the Chinese.
The OBR made substantial upward revisions to its projections for VAT and corporation tax, and reduced its forecast for interest payments on the UK’s national debt.
Osborne also announced three major tax changes that will raise a total of £28.5bn over the next five years. The chancellor said he would raise £3bn a year from a new apprenticeship levy on bigger businesses; £2bn a year from councils, which will be given greater power and financial responsibility but smaller government grants; and £1bn from higher stamp duty – an extra 3 percentage points – on the purchase of buy-to-let properties and second homes.
Together with the pick-up in tax receipts, this allowed the chancellor to safeguard the £10bn budget surplus he has pencilled in for the final year of the parliament.
Against a backdrop of weaker global growth, the chancellor said a surplus was necessary to ensure that Britain was ready for any storms that might lie ahead. “We are mending the roof while the sun is shining,” he said.
Osborne said a doubling of the housing budget would ensure the biggest housebuilding programme by any government since the 1970s. He also announced an extension to London of the Treasury’s help-to-buy scheme – originally supposed to be a time-limited three-year programme when introduced in 2013.
Homebuyers in the capital able to find a 5% deposit will be able to get an interest-free loan worth up to 40% of the value of a newly built home. The idea had been strongly pushed by Zac Goldsmith, the Conservative candidate in next May’s London mayoral election, which is being seen as the first big test of Jeremy Corbyn’s Labour party leadership.
Ray Boulger, of the mortgage advisers John Charcol, said the delay until next April in bringing in the changes to stamp duty risked setting off a property boom. “Giving four months notice of a substantial (150% for properties between £125,001 and £250,000) increase in stamp duty land tax brings back memories of the short-term boom before bust in 1988 caused by the chancellor giving similar notice of the abolition of double Miras (mortgage interest relief at source).
Each of the successive five draft forecasts sent confidentially to the chancellor by the OBR ahead of the spending review was more optimistic than the previous one, giving the chancellor more and more leeway to meet his goal of putting the overall budget into surplus by 2019-20, execute a U-turn on tax credits and spare many government departments some of the pain they were expecting. In March, government departments faced a cumulative spending cut of £30bn by 2019-20. These estimates fell to £18bn in July and £10.4bn in November.
Nevertheless, the spending review contained an array of cuts that will change the shape of the state with cumulative cuts of more than 45% for many key departments since 2009-10.
Specific cuts include an end to grants for student nurses, who must now pay for their own training with the help of loans. The cap on recruitment of student nurses will be lifted.