Labour Market

IEA Reaction to Budget


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Lifestyle Economics

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Commenting on the Budget, Mark Littlewood, Director General at the Institute of Economic Affairs, said:

Introduction of a national living wage:

“The decision to introduce the National Living Wage is intellectually bankrupt. Almost a fifth of workers will now see their hourly rate of pay determined by a government quango. The reform is based on the idea that tax credits currently subsidise employers. There is scant evidence for this. The government has changed the remit of the Low Pay Commission to target inequality rather than set a wage floor. The Commission should be renamed accordingly.

“The ease with which the Chancellor glossed over the problems which will be faced by more than 60,000 people in seeking gainful employment was frightening. These are often the most low skilled and vulnerable in society.

“The new name for this wage setting policy will mean that changes to the rate will always be judged against the Living Wage campaign. Instead of companies setting wages according to work done by their employees, they will now face increased pressure to compensate workers for high rents and high energy costs often driven by misguided government policies.”

Welfare and tax credits:

“Leisure should not be an option at the expense of the taxpayer, and several of today’s announcements strengthen the principle that work must pay. The composition of the cuts, entirely focused on working-age welfare, may be seen as immoral given pensioners have been completely exempted. They too should have shared the burden.

“Tax credit spending must come down with genuine reform, but most of the savings in this area will be achieved in ways that undermine work incentives. Increasing the withdrawal rate will mean a tax credit recipient paying the basic rate of income tax and national insurance contributions will now face an effective marginal tax rate of 80%.

“It would have been far more sensible to reform requirements for part-time recipients to increase work levels over time, which could have delivered similar savings without dampening incentives.”


“This Budget was a missed opportunity to bring down the 45p rate of income tax. When the rate was cut from 60% to 40% in 1988, tax revenues soared because it created the incentive to work and invest in Britain. Changes to the 40p threshold also look feeble, increasing more slowly than wage growth. Politicians should raise this threshold annually by the higher of wage growth or inflation to begin to compensate for years of under-indexing.”

“The announced reforms to inheritance tax may be headline-grabbing, but are poorly thought through. Aside from adding additional complexity, the changes may well lead to a raft of unintended consequences by encouraging some cash-rich pensioners to upsize if they have the resources to buy a property for £1 million, further distorting our already dysfunctional housing market.”

Public finances:

“George Osborne deserves credit for taking an economically sound and responsible position on the necessity of balancing the books, yet cutting the deficit at the same rate as during the last Parliament is a modest policy. Given the fiscal headwinds of our ageing population, without significant changes to spending levels, huge sacrifices will have to be made by future generations either through significantly higher taxes or reduced benefits.”


“A review of tax relief on pensions is welcome as long as it does not lead to the adoption of the half-baked proposals for ‘equalising’ tax relief at 30%. Instead, the government should phase out the tax-free lump sum. If the government does that, abuse will end and no other changes are necessary. We will have a stable system and the government can tear up those parts of the tax code designed to prevent avoidance”

Notes to Editors:

To arrange an interview with an IEA spokesperson, please contact Stephanie Lis, Head of Communications: 07766 221 268, [email protected]

To read more on whether tax credits subsidise employers, click here.
To read more on whether the Living Wage is an alternative to tax credits, click here.
To read more on tax credit taper rates, click here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.