Unshackled Osborne Unleashes Radical Budget

After years of being tied down in a coalition with the Liberal Democrats for the last five years, George Osborne showed his true colours today with a radical Budget, the first delivered by a Conservative Chancellor in a Conservative government since Ken Clarke back in 1996.

The main strand running through this Budget, as Mr Osborne sees it, is to create a high wage, high skill, low tax economy.

To that end, there was a pledge to cut the headline rate of corporation tax from 20% to 18% by 2020, a new permanent annual investment allowance and various other nudges aimed at incentivising businesses to take on more apprentices.

Underlying this was the show-stopper of the Budget - the imposition of a new National Living Wage.

This was dramatic stuff from a Chancellor whose party opposed the creation of a minimum wage when it was introduced by the last Labour government in 1997.

Then, Mr Osborne’s party argued the minimum wage would destroy jobs, so it is ironic that the Office for Budget Responsibility (OBR) has reached exactly the same conclusion of the living wage.

It estimates 60,000 people will lose their jobs when it is introduced and it is not hard to see who they might be - low-skilled, low-paid workers in sectors such as hotels, restaurants, retail and catering.

And it is a fair bet that, since the living wage will kick in at the age of 25, there will be a cliff-edge effect as employers plump for younger workers where they have identical skills to those of the over-25s.

The living wage is part of a panoply of changes to the welfare system aimed at shaving some £12bn a year from the budget and which, in crude terms, will benefit workers earning less than £12,500 a year at the expense of those earning above that - and up to £50,000 or so - who see their tax credits trimmed by the government.

Broadly speaking, Mr Osborne is hoping that the cost of keeping people on low pay will switch from taxpayers to businesses and, in particular, some large employers.

Central to the creation of a higher paid and higher skilled economy will be cracking the productivity puzzle - higher productivity per worker means stronger growth, higher wages, more tax receipts and, accordingly, less austerity.

We shall have to wait until Friday to hear more on Mr Osborne's proposals on this front.

But there were plenty of other announcements hinting at further radicalism to come - Mr Osborne is to consult on what would be a colossal change to the pensions system.

At present, pensions attract tax relief when money is paid into them and are taxed when the pension is spent.

Instead, the Chancellor is looking into adopting a system where pensions would become more like ISAs, with pension contributions paid from taxed income but then the income from those pensions remaining protected from taxes thereafter.

This is a move that will cause disquiet in the savings and investment industry as the tax relief on pensions is a key reason for saving in them.

To that end, it was disappointing to see Mr Osborne raiding the ability of higher earners to save for their old age - deterring productive investment in the economy - to pay for his gimmicky increase in inheritance tax thresholds when applied to family homes.

The logic behind this move, a Conservative manifesto commitment, is odd, to say the least – it is not immediately clear why homes should enjoy preferential treatment over other assets when it comes to inheritance tax.

One move likely to be welcomed by younger voters, meanwhile, is the decision to restrict tax relief on mortgage interest for buy-to-let landlords at the basic rate of income tax.

Such landlords have enjoyed an unfair advantage over first-time-buyers for many years and this will help level the playing field.

Other eye-catching measures include a pledge to phase out the banking levy and replacing it with a more general tax on the UK profits of banks - a move squarely aimed at preventing the likes of HSBC and Standard Chartered from leaving the UK.

And, underpinning it all, a reminder that Mr Osborne's main aim in this parliament is to remove the deficit and bring the budget back into surplus by the time of the next general election.

It is not going to happen overnight. While the OBR has reduced the amount it expects the country to borrow this year, the number is coming down from £75.3bn to a still-chilling £69.5bn.

There is still a long way to go, then, on deficit reduction - but today Mr Osborne hinted at the more radical ambitions that he also has for the next few years.