George Osborne has used the first Tory-only Budget for nearly 20 years to introduce a “living wage”, dramatically declaring that “Britain deserves a pay rise”.
Hailing a new “higher wage, lower tax, lower welfare” Britain, the Chancellor said from next April everyone over 25 would be entitled to £7.20 an hour – and the figure would rise to £9 by 2020.
Some six million people will see their pay increase as a result – and those currently earning the minimum wage of £6.50 an hour will be £5,000 better off by 2020, he claimed.
Mr Osborne said he was following the Conservative tradition as the party that brought in protections for mill workers during the industrial revolution.
“Taken together with all the welfare savings and the tax cuts in this Budget, it means that a typical family where someone is working full-time on the minimum wage will be better off,” Mr Osborne told MPs.
But acting Labour leader Harriet Harman responded by claiming the Budget was “making working people worse off” by cutting tax credits for the low paid and grants for students from poorer backgrounds.
The announcement was the final flourish in an audacious package of reformswhich amounted to the biggest shake-up in welfare for decades.
Mr Osborne took an axe to tax credits, declaring that families will only receive the handouts and Universal Credit payments for the first two children.
People under the age of 21 will no longer be automatically entitled to housing benefit, all working age benefits will be frozen for four years, and social rent payments will be cut 1% every year until 2019.
He also confirmed that the benefits cap is being reduced from £26,000 to £23,000 in London and £20,000 in the rest of the country.
Student grants are being scrapped and replaced by loans to save £1.6 billion.
But the Chancellor also took advantage of a windfall from higher-than expected tax revenues to slow the pace of the £12 billion welfare reductions – saying the annual cut will not be fully implemented until 2019-20, two years later than previously planned.
Austerity cuts have also been slowed in response to concerns from international bodies such as the OECD, and the Government is not now due to meet Mr Osborne’s target of an absolute surplus until 2018-19 rather than 2017-18.
Mr Osborne pointed to the crisis in Greece to argue that spending cuts and a “new settlement” were essential.
“Britain still spends too much, borrows too much, and our weak productivity shows we don’t train enough or build enough or invest enough,” he said.
“This is the new settlement. From a one-nation Government, this is a one-nation Budget that takes the necessary steps and follows a sensible path for the benefit of the whole of the United Kingdom.”
The OBR has forecast that the new living wage – Mr Osborne’s retort to critics who have suggested he is not helping working people – will result in 60,000 fewer jobs, but the impact will be reduced because of corporation tax being cut to 18% by 2020.
The Low Pay Commission will be given responsibility for recommending futurerises to the National Living Wage, with the remit that it should reach 60% ofmedian earnings by 2020.
Mr Osborne said the Office for Budget Responsibility (OBR) believed that even with the NLW there will still be one million more jobs in total by 2020.
“They also estimate that the cost to business will amount to just 1% of corporate profits. To offset that I have cut corporation tax to 18%,” he said.
“To help small firms I will go further now and cut their national insurance contributions.”
The move had been kept a closely guarded secret by the Treasury’s core team, and was greeted warily by business figures.
John Allan, chairman of the Federation of Small Businesses, said: “Even though offset by a welcome increase in the employment allowance, some will find the new National Living Wage challenging.”
Arguing that the “best way to help working people is to let them keep more of the money they earn”, the Chancellor said tax thresholds would also go up.
The personal allowance will rise from £10,600 to £11,000 next year, and the higher rate threshold from £42,380 to £43,000. Mr Osborne said the increases were a “downpayment” on pledges for them to hit £12,500 and £50,000 respectively by 2020.
Critics immediately highlighted that the NLW was significantly below theexisting non-compulsory living wage rate of £7.85.
In a step that will intensify fury over plans to give MPs an 11% pay rise this year, public sector employees now face four more years with increases capped at 1%.
Promising a full plan later this week to address UK plc’s dire productivity levels, Mr Osborne said a new levy on big businesses would help to fund three million more apprenticeships.
The Chancellor said £37 billion of fiscal consolidation was needed during this parliament, but delighted Tory backbenchers by announcing the Government is committed to maintaining the Nato target for spending 2% of GDP on defence.
Ministers have previously avoided saying they will stick to the rule.
He confirmed that alongside £12 billion of welfare savings by 2019-20, the Exchequer was relying on bringing in £5 billion from a crackdown on tax avoidance.
Acknowledging a well-received Labour policy from the election campaign, Mr Osborne announced that permanent non-dom tax status was being abolished from April 2017 to raise £1.5 billion.
“British people should pay British taxes in Britain, and now they will,” he said.
Details of £20 billion of cuts to departmental budgets will be hammered out in the forthcoming spending review.
As an anti-austerity protest took place outside parliament, Mr Osborne told MPs: “Many difficult but necessary decisions are required to save money and this will be done with moderation but determination.
“This is a one-nation Government that does the best thing for the economy and the right thing for the country.”