Monday 13 July 2015 8:27 pm

Ignore the rhetoric: George Osborne’s July Budget was a retreat from market liberalism

George Osborne’s desired message was clear. He claimed last week’s Budget was a new settlement for a “higher wage, lower tax, lower welfare country”. The Tory media duly reported it as such. But political rhetoric often doesn’t match reality. Osborne’s Budget fails on his own terms, and marks a retreat from the market-based consensus of the last 30 years.

Certainly, the overall fiscal stance is conservative. The remainder of deficit reduction was sensibly smoothed, ending the planned roller-coaster of sharp cuts then spending rises until 2020. A fiscal rule – to run surpluses in times when the economy is growing at more than 1 per cent – is crude, but highlights the need for restraint to get debt to sustainable levels given the threat of large future recessions.

Yet this Budget brought about more spending and more taxes than promised in March, and exacerbated the longer-term fiscal challenge by continuing to exempt the NHS and pensioners from cuts. Yes, the personal allowance was raised and corporation tax cut, but this masked large increases in revenue from economically-damaging dividend taxes, unjustifiable restrictions on mortgage interest tax relief, a rise in insurance premium taxes, and higher rates of vehicle excise duty. Net revenues will be as much as £9.9bn higher by 2018-19. Hardly the low tax Budget promised.

Other actions should make market liberals shudder. Tories increasingly believe the business of government is the government of business. Their actions suggest they think productivity growth requires more intervention, with large infrastructure projects, corporatist apprenticeship levies and the introduction of the “National Living Wage” (NLW). It has apparently escaped Osborne’s attention that the more productive US shuns this continental model.

Indeed, the chancellor has chosen the corporatist approach of treating big business like a lapdog – trying to bring it to heel, but giving it treats when it does things the government likes. This makes businesses responsible for meeting government aims, but still results in more economic activity being determined by bureaucrats and politicians.

This energy could instead have been channelled into much-needed tax and land use planning reform – both of which could genuinely raise productivity and hence wages. Instead, the tax code got more complex and housing policy got messier, with inheritance tax changes further increasing the demand for property and restrictions in social rents further restricting supply.

But it’s perhaps on welfare and wage-setting where market economics was most ignored. Margaret Thatcher and Keith Joseph recognised that governments setting wages was damaging. Far better to allow markets to operate and then top up wages for those with low productivity, to ensure the social aim of decent living standards is met. Even Gordon Brown knew this, though he botched his tax credit system because he wasn’t clear about whether tax credits should be primarily a wage supplement or an attempt to reduce poverty.

Though reform was necessary, and future restrictions for those with large families makes sense, Osborne’s slashing of tax credits will worsen incentives for many. Increasing the withdrawal rate means many families, often poorer than those benefiting from the NLW, will now face marginal tax rates of 80 per cent. Meanwhile, the new NLW for those over 25 will freeze tens of thousands of low-skilled workers out of the labour market altogether. Conservatives used to believe in both the power of incentives and that a low paid job was better than no job at all.

The dirty secret in all this is that, despite the claims of Tory supporters, the new NLW does not really lower overall spending. The policy will save just £200m. The OBR clearly shows any tax credit savings are almost entirely offset by the effects of increased prices and earnings on public sector pay, state pension payments, and welfare for those forced out of work.

Devoid of economic logic, the Budget shows Conservatives retreating from market liberalism. Faster economic growth than expected may help Osborne get closer to a “higher wage, lower tax, lower welfare country”. But that will not be thanks to this Budget.