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George Osborne's real plan: erase every trace of Gordon Brown

Tax credits are in the crosshairs as the Chancellor unravels his predecessor's client state

11 July 2015

9:00 AM

11 July 2015

9:00 AM

To understand George Osborne, it is important to realise that he cut his political teeth at the height of the New Labour ascendancy. He remembers the humiliations that were visited on his party as Tony Blair carried all before him. But there is one moment from that period that Tories can look back on with satisfaction: their opposition to Britain joining the European single currency. In 1998, William Hague warned, in a speech drafted by Osborne, that the euro would become a ‘burning building with no exits’.

When this speech was written, Osborne couldn’t have imagined that those flames would be the backdrop to the first Budget of his second term as Chancellor 17 years later. But events in Greece have overshadowed this, the first Tory Budget for 18 years. For despite the fact that the measures Osborne announced were undoubtedly significant, including a national living wage, they do not compare with the dramatically increasing chances of Greece leaving the eurozone. If this were to happen, it would trigger a crisis which would have to end either with the break-up of the single currency or the construction of a transfer union which would move money from rich eurozone countries to poor ones.

Another key to Osborne’s political personality was his willingness to take on the job of shadowing Gordon Brown in 2005. Brown was at the height of his powers then. He had swatted away a succession of Tory shadow chancellors, and many in the shadow cabinet were rather afraid of him. David Cameron declined the opportunity to go toe to toe with Brown when Michael Howard offered the job to him, but Osborne jumped at the chance.

Osborne was successful by — in the words of one of his closest political allies — ‘not being afraid’. In office, he has been determined to unwind the Brown legacy. He was more aware than any other Tory of how Brown spent 13 years trying to create Labour voters through an expanded public sector, welfare and tax credits. Osborne has systematically set about reversing these structural changes. In the last parliament, public sector employment fell by more than 400,000 while the number of jobs in the private sector increased by two million. Osborne also turned the issue of welfare against Labour. Its initial opposition to his benefits cap, a £26,000 limit on what a non-working able-bodied household could receive in benefits, enabled Osborne to portray his opponents as being in favour of unlimited welfare. It is no coincidence that he has chosen in this Budget to lower the cap to £23,000 and to take it down even further to £20,000 outside London and the Southeast. Few things would make him happier than if Labour again opposed this measure.


But Osborne’s main target this time round was the Brown tax-credits regime. In his 2010 Budget, Osborne limited how far up the income scale they went. In this one, he has started to dismantle the whole system.

Given that tax credits cost almost £30 billion a year, it is obvious why a Chancellor seeking to balance the books would want to cut them back. But in the past few weeks, Cameron and Osborne have gone further than that. They have attacked the entire intellectual rationale for them. They have, publicly and privately, begun to embrace the view that tax credits have suppressed wages: that they have led to employers paying people less than they otherwise would have done. They are not the only ones convinced by this argument. Labour’s last chancellor, Alistair Darling, also suspects that tax credits have kept wages down. If this is the case, then there is a strong case for scrapping them altogether. To the Tory leadership’s delight, this is what Frank Field — the former Labour welfare reform minister who is now the chair of the work and pensions select committee — is urging the government to do. But even if one is convinced that wages would be higher without tax credits, there will be a transition period between tax credits being cut and wages rising. Osborne is trying to overcome this by the introduction of a new national living wage and by raising the personal allowance, the amount people can earn before they pay income tax. This also gives a mini tax-cut to everyone.

One thing Osborne remembers well from that period of New Labour dominance was how every Tory suggestion of a tax cut was immediately translated by Labour into a reduction in the number of nurses or teachers. He now has his own version of this tactic: every Labour commitment to more spending is turned into either a tax hike or an increase in borrowing. With his proposal for a legal requirement for a budget surplus, Osborne is trying to turn the screw further. If Labour accepted this, then the Tories would be able to claim that any plans for additional spending was equivalent to a tax rise.

But at the same time as putting Labour on the back foot, Osborne wants to create more Tories. One of the ways he aims to do this is by showing that Conservatism is not just for rich southerners. His ‘Northern Powerhouse’, a mixture of devolution to the cities of the north and infrastructure investment, is a crucial part of the pitch. It took a blow last month when the electrification of various railway lines had to be ‘paused’. I understand that Osborne was keen to avoid this, and had the Treasury ask how much more money was needed. The answer was that the whole project was so troubled that cash alone couldn’t fix things. This is a reminder of the awful management that still bedevils too many infrastructure projects in this country.

Owning your own home is one of the things that turns people Tory, and Downing Street is now prepared for a fight to get more homes built. Under the new rules Osborne is expected to propose, it will now be easier to overrule local objections to new housing being built. Osborne’s personal standing has never been higher. The political strategy that he pursued in the last parliament has been vindicated. The question about him now isn’t whether he can survive as Chancellor, but whether he ends up becoming Prime Minister.

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