Tax credit staff 'deal with suicidal callers every day'

Tax credit cuts: what next after dramatic Lords defeat?

27 October

Government plans to save £4bn by cutting tax credits have been defeated in the House of Lords in a major blow to the Tory chancellor George Osborne. The defeat, which follows a growing rebellion among Conservative MPs over the impact of the cuts on their constituents, is a political embarrassment to the government and provides hope to opponents of the reforms, who believe they target the very people the Conservatives have vowed to protect.

What did peers vote for last night?

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Four motions had been put forward on the plans, including a 'regret' motion tabled by the Bishop of Portsmouth (the traditional way the Lords expresses distaste at government spending plans) and a nuclear 'fatal' motion tabled by the Lib Dem peer Baroness Manzoor. The 'fatal' motion was the first to be voted on and it failed; the 'regret' motion never went ahead.

This was because two other motions forcing a rethink from the government both narrowly passed. One was put forward by the crossbench peer Lady Meacher and called for a delay while the government responded to concerns raised by the likes of the Institute for Fiscal Studies – it passed with a majority of 30. Another, stronger delaying motion, this time tabled by Labour's Lady Hollis, called for the policy to be put on hold until it had been watered down – it passed with a majority of 17.

Will Osborne now water down the cuts?

Specifically this motion calls for the tax credit cuts to be put on hold "until measures have been brought forward to mitigate for at least the next three years their effect on the poorest families", says the Financial Times.

Osborne has effectively climbed down and said he will do just that at the Autumn Statement at the end of next month. Yesterday he'd already said he was "in listening mode" due to the scale of opposition from his own benches. The chancellor had hoped this would be a bargaining chip to force the Lords to back down.

"I said I would listen and that's precisely what I intend to do. I believe we can achieve the same goal of reforming tax credits, saving the money we need to save to secure our economy, while at the same time helping in the transition," he said.

Who needs this transitional protection?

In short, a lot of people. Many will lose out in the four-year period between when the tax credits are introduced in full next year and 2020, when the new minimum wage is fully phased in. But the think-tank Policy in Practice reckons as many as half to two-thirds of existing claimants will be worse off even then.

The government has always argued that the majority of existing claimants will be better off, but this is based on basic mathematics rather than empirical analysis. Essentially the new minimum wage of £9 per hour would equate to an income for someone working 30 hours a week (the minimum a single person needs to be working in order to earn tax credits) of around £14,000 a year – more than the maximum to qualify for payments. On top of this tax allowance, changes will allow people to keep more of their income and parents to get free childcare.

But most of the people on tax credits are parents with children at home who are working closer to the 16 hours a week minimum and this category will benefit less from the mitigating changes. Parents under the age of 25 are not even guaranteed a wage rise as they do not qualify for the new national living wage.

What can Osborne do about it?

He has a few options. To offset the timing issue he could ease in the changes over three years to reflect the phasing of wage increases. As for the losses to part-time workers and others, he could increase the level at which tax credits start to be withdrawn, to protect those on the lowest incomes.

The chancellor could also choose to keep the tax credit policy intact and offer protections through other means, for example by accelerating tax allowance changes or offering specific and targeted national insurance concessions to let the lowest earners keep more of their income. For those who do not like the 'merry-go-round' effect of tax credits, this might be preferable.

Is the vote a constitutional crisis?

That is a key question coming out of the Lords vote. What they did was certainly lawful – the policy was not contained in a formal financial act so is not covered by the famed Salisbury-Addison convention or the Parliament Act. But in the last century, peers have never voted down a piece of legislation related to a sitting government's spending plans, so this is a significant challenge.

David Cameron has apparently ordered a "rapid review". The government is outnumbered in the Lords so it could seek to 'flood the chamber' with Tory peers to be sure of getting its way in future, but that would be a controversial move for an already overcrowded upper house. Another option might be to enshrine the principle relating to finance legislation in law.

So what happens next?

Osborne will speak in the Commons today and will probably confirm once again that arrangements will be made for transitional protection. On Thursday, an all-day debate – brought by both Tories and Labour MPs – will be held in order to outline some tweaks that could be made to the policy. But the final changes are unlikely to be confirmed until the Autumn Statement.

Tax credit cuts: will the House of Lords veto reforms?

26 October

Government plans to cut tax credits for low-income workers could fall foul of a "fatal motion" today – an arcane but deadly aspect of parliamentary procedure that serves to stop legislation in its tracks.

The motion is just one of four votes the controversial policy is facing in the House of Lords, where the Conservatives do not command a majority. If successful, it could result in the policy being delayed while the chancellor, George Osborne, is forced to prove his case more fully.

Downing Street's plans are swiftly turning into a constitutional crisis that some have warned may even place the Queen in an "uncomfortable" position. So what is happening in the UK parliament's second chamber?

What is a fatal motion?

Nicknamed the "nuclear option" – and not without reason – a fatal motion is a highly unusual measure that has the power to stop legislation dead, thereby forcing the government to restart the process of enacting the cuts in the Commons. Think of it as a last-ditch missile designed to torpedo proposed laws. The BBC's James Landale says that fatal motions are extremely rare – only five have passed in the last century.

Why is it being tabled?

The reason is the virulent opposition to the government's plan to cut tax credits, which the Institute of Fiscal Studies says would leave as many as three million low-income families worse off by £1,000 a year from next year.

Who is tabling the motion?

Liberal Democrat peers. Lord Dick Newby, the party's chief whip in the Lords, says that this is the only recourse given that the cuts have been introduced through a 'statutory amendment', a piece of secondary legislation that "permits very little discussion in either house" and is largely "unamendable".

Can the Lords overrule the government in this way?

This is also a matter of fierce debate. David Cameron has warned the House of Lords against blocking the changes and questions their authority to do so. Senior government figures have said it amounts to an unprecedented power grab on the part of the Lords.

Crossbench Labour and Liberal Democrat peers, who together have more peers in the Lords than the government, say that tax credit cuts were not in the Conservative manifesto and are therefore not protected by the so-called "Salisbury-Addison convention", under which the House of Lords does not stand in the way of election promises.

What happens if the motion passes?

The bill will fall, dealing a huge political blow to the government. It could even trigger a constitutional crisis, prompting David Cameron to reform the House of Lords in order to prevent a repeat performance.

Is there a "non-nuclear" alternative?

Yes. A Labour motion, tabled by Lady Hollis, will call for a delay to the cuts while the government introduces "transitional measures" to protect those who will be hit by the changes. Another motion proposed by cross-bench peer Lady Meacher similarly asks for a delay while the government produces reports to support its case.

According to the government, any motion to stop a rule change that is fundamental to the sitting government's financial plans would be a "fatal motion" in all but name.

What can the government do?

Cameron has reportedly threatened to "flood" the House of Lords with as many as 150 Conservative peers in order to redress the power balance back in the government's favour if it loses a vote today. The Times cites Meg Russell, director of University College London's constitution unit, as saying that this would put the Queen in an "uncomfortable" position, as she would have to quickly approve a number of clearly partisan appointments to resolve a political dispute.

If that is the stick approach, the carrot is the overtures to the Lords that are being made by those at the top of government suggesting that Osborne will soften the policy at the Autumn Statement next month. Nicky Morgan, the education secretary, told the Financial Times that while the tax-credit policy would not change and that it was vital to reform the relationship between work and welfare, the chancellor was “in listening mode”.

What changes could be made?

The government has always maintained that by 2020, the majority of existing claimants will be better off as a result of the increase in the minimum wage for over-25s, increases in the lowest income tax threshold from £10,600 currently to £12,500, and increased free childcare for working parents. It reckons a family with one earner working full-time on the new national living wage will gain £2,300 from the first two of these elements alone, more than offsetting a £1,300 average working tax credit loss.

But the changes to tax credits are being introduced next April, leaving four years during which many people will be much worse off. Younger parents or those working part time, who will not benefit in full from the minimum wage changes, could still lose out to the tune of hundreds of pounds a year overall.

Changes could include accelerating the personal tax allowance increases – perhaps coupled with a downward adjustment at the higher rate threshold to ensure higher earners do not benefit. Osborne could also retain the basic principle of the tax credit cuts while fiddling with the details to protect the lowest earners. A proposal from Tory MP David Davis to be debated in the Commons, calls for the threshold at which payouts are removed to be pushed higher, but the rate of withdrawal increased.