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George Osborne delivered his second Budget of the year last week, the first Conservative Budget in 19 years and the first opportunity to decisively set the tone for the coming Parliament and signal the change from a coalition to majority government.
Some of the biggest announcements were on tax, welfare and wages – all part of the shift towards a ‘high pay, low tax and low benefits economy’. As Naomi Clayton wrote here, these will play out differently across different cities: with the minimum wage likely have a positive effect, in the short-term at least, in cities with high levels of people on low pay while cities with high shares of people on good salaries less affected.
Devolution was another key element, with the Northern Powerhouse name-checked within minutes, and new powers announced for Greater Manchester – setting the city-region aside from the rest, with more freedoms and flexibilities than even London. The Chancellor did also invite expressions of interest for devolution from other cities, counties and districts, and hint that further deals with the Liverpool City Region, West Yorkshire and South Yorkshire could yet follow, but the terms for significant devolution remain very clear: metro mayors in exchange for more powers. And there remains the question of what’s on offer for cities who do not meet the governance requirements, or for our smaller yet successful cities in the next Parliament.
Beyond the specifics however, two interesting themes emerged that indicate the Budget that could signal a shift in this Parliament over how we fund the provision of public services and key infrastructure in the future.
The announcement of a new national living wage of £9 per hour by 2020 (for those aged 25 and over) sent a signal that businesses have their role to play in ensuring work pays for more people and marks a shift in the balance of responsibility between the public and private sector. By 2020, household income won’t have changed much for a family on the minimum wage (in fact single earner households on the minimum wage will be worse off), but more of that income will come from wages than is the case now, where lower salaries are topped up by tax credits or benefits. The expectation from Government is that businesses will have to step in to help deliver a ‘higher pay economy’ that will boost productivity.
The new skills levy on large employers to fund three million new apprenticeships sends an equally strong signal that the private sector has a bigger role to play, and will be compelled to play it, in improving outcomes that are too often conceived as within the realm primarily of the public sector. There is broad consensus that employer-led skills improvement can lead to better outcomes for both learners and companies. By creating a more direct connection between firms and workforce development, the Government is asking businesses to foot some of the bill for the skills that they need now, and in the future, to grow.
The new apprenticeship levy also raises another interesting theme: a shift towards a user-pays principle in funding public services. Asking businesses to fund elements of workforce development such as apprenticeships should help create a more direct connection between the skills and training that people acquire and the demand for those skills in the labour market. It certainly marks an interesting and welcome shift towards the beneficiaries of public services paying for them more directly.
The Chancellor also announced that alongside reforming rates and bands of Vehicle Excise Duty, the tax payable by most vehicles on UK roads, the tax will be hypothecated and revenues channelled into a new Roads Fund to be re-invested directly to pay for improvements to the road network. The theory is that this will improve the connection between how services are funded and who they benefit, injecting more fairness into the system and creating tighter feedback loops between policy design and delivery.
Looking ahead, I wonder if these subtle yet significant shifts tell us something about the future of infrastructure and public service funding in the next five years. With further education budgets set to be stretched further, will businesses be asked (or compelled) to foot more of the bill for educating and upskilling the workforce? Does the new apprenticeship levy and hypothecated vehicle excise tax open the door for other, and welcome, changes to how we tax and fund public services, such as introducing road taxes or local hotel taxes? With further public expenditure cuts in the pipeline and strong signals from the Chancellor that such reforms are possible, I’ll be watching to see what further changes are announced in the autumn, and beyond.
 SMF Analysis of the impact of tax credit and living wage policies introduced: http://www.smf.co.uk/will-the-new-living-wage-make-up-for-the-cuts-to-tax-credits/
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