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Tax credit cuts: will the government water down its policy?
21 October
The most direct threat to the Conservative government's controversial cuts to tax credits has been seen off, but opposition to Osborne's reforms continues to mount even within the Tories' own ranks.
A 'fatal motion' put forward in the House of Lords by crossbench peer Lady Meacher has been withdrawn, the Guardian reports. Following warnings from the government over a "constitutional crisis" were the second chamber to overrule the supremacy of the Commons, the life peer and former social worker has instead proposed a delaying motion to give time for a second formal debate on the measures.
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Fatal motions have been tabled only five times over the past century, according to the government, and they have only been successful three times. By convention the Lords do not vote down government spending plans, but the fact that the tax credit reforms sit outside the main Finance Bill and were not explicitly disclosed in the Conservative election manifesto has prompted claims that the so-called Salisbury-Addison convention does not apply.
The Liberal Democrat leader Tim Fallon has instructed his peers – who number 108 in total – to vote for the fatal motion. The Tories are outnumbered in the Lords and so it is possible they might lose the vote and be forced to rethink the policy from scratch.
Instead the Conservatives are left with a more straightforward political problem – but one that is growing. The Financial Times notes that chancellor George Osborne came under fire during an opposition day debate in the Commons on Tuesday from his own benches, with the new Tory MP Heidi Allen using her maiden speech to rail against cuts she described as "too hard and too fast".
The government won in a purely symbolic vote at the end of the debate, but there are growing calls for amendments to soften the impact of Osborne's cuts at the autumn statement next month.
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Where to from here?
Osborne has so far refused to budge on a policy that will cut up to £5bn from the current tax credit bill and, the Treasury claims, equate to total savings of £15bn a year. With £12bn of welfare cuts promised in its manifesto, and £20bn of reductions to government spending still to be made in an upcoming spending review, the chancellor maintains the reforms are necessary.
Osborne and David Cameron continue to insist that the changes are being misrepresented and that most people will gain from a total package that includes increases to the minimum wage for the majority, a reduction in income tax bills and free childcare. The government's Summer Budget document states that by 2020 most families, including those with either one or two earners on the new over-25s 'national living wage', will be better off.
The problem is that even with those numbers two in ten families will lose out, most likely part-time workers on the lowest wages or younger people under the age of 25 who aren't covered by the new minimum pay rules. Many families will also lose out for four years from next April until the full force of mitigating changes are in place by 2020.
Tackling these issues is the thrust of a cross-party motion, tabled by the Conservative MP David Davis and the Labour MP and Works and Pension Committee chair Frank Field. The motion has been granted a debate at the end of October – and it is to allow a vote on this that Lady Meacher is hoping to delay Lords approval.
In addition to calling for the timetable of tax credit cuts to match the phased introduction of wage rises and income tax cuts, Field proposes increasing the threshold at which tax credits begin to be removed and increasing the pace of their removal higher up the income ladder. He says that by 2020 this plan would be revenue neutral for the Treasury.
Tax credits would be paid in full for wages of up to £4,750 instead of the proposed £3,850, but those earning more than £13,100 would have their payouts withdrawn at a faster rate than the 48p for each pound earned in current plans.
Other options
If Osborne decides to tweak his reforms, another option would be to accelerate the changes to the income tax thresholds in order to boost net income for low-paid workers. The government is already increasing the threshold by £400 to £11,000 from April, boosting net pay by £80. It also has plans to boost wages by another £300 a year by 2020 by lifting the threshold to £12,500.
Field argues that the government should resist this temptation as "such a strategy… would compensate everybody – including the whole Cabinet – for a cut being made to the poorest workers' incomes". This problem could be mitigated by a corresponding reduction in the band at which 40 per cent 'higher rate' tax applies, making it tax neutral for most middle class families.
Osborne may decide to tough it out, rather than back down, reasoning that good news on wider wage rises could yet alleviate criticism, or that the anger over cuts will dissipate in the years before the next election as other measures kick in. But with many referring to the tax credit cuts as a potential 'poll tax moment' – and even grandees such as London Mayor Boris Johnson criticising the policy publicly – the chancellor will certainly be having doubts.
Tax credit cuts: 'fairer' system or 'attack on strivers'?
19 October
Many commentators have likened the policy to the poll tax, which eventually contributed to the downfall of the previous Tory prime minister Margaret Thatcher.
The controversial cuts to working and child tax credits could face a second vote on Tuesday, at the end of an 'opposition day' debate brought about by Labour. Any vote that takes place "will not change the law as the reforms have already been approved", the BBC notes, but the reforms could be deeply damaging for the government, especially if a number of Conservative MPs decide to cross the floor.
As the clamour for at least a partial U-turn grows by the day, David Cameron and his chancellor George Osborne are so far holding firm. They continue to dispute the numbers being touted by MPs opposed to the reforms, who are claiming the cuts amount to an assault on the working poor.
Confusion reigns
The trouble is that the numbers are immensely confusing. As a case in point take Michelle Dorrell, the 35-year-old working mother and single parent, who voted Conservative in May and lit the fuse on the debate last week. She broke down in tears on BBC One's Question Time after claiming that the party had "betrayed" her over the cuts.
Opponents of Osborne's reforms have seized on the incident as an example of how the Conservatives have abandoned the very people they now claim to represent. But a senior analyst at the Institute for Fiscal Studies told the Daily Telegraph that the Kent-based mother of four is unlikely to be affected, as the nail business she operates from home does not make a profit and the cuts to child tax credits do not affect existing claimants.
What is actually changing?
The government will save about £5bn from the tax credit bill by cutting the level at which working tax credits begin to be taken away, increasing the rate at which payouts are reduced and tightening eligibility criteria for child tax credits.
Specifically, the maximum income you can earn while still receiving the full entitlement to working tax credits will fall from £6,420 to £3,850, with payments being reduced by 48p for every pound earned above this level rather than the previous 41p. The income rise within a year that is disregarded for the purposes of calculating entitlement is also being halved from £5,000 to £2,500.
As for child tax credits, from April 2017 parents will no longer receive additional payments when they have a third child or any subsequent children. This will only affect children born after this date – so existing parents with three children or more will not see their payouts reduced.
The government's case
Tax credits have risen in cost from an initial £1bn a year when they were introduced in 1998 to around £30bn now. According to the government's Summer Budget document, the changes will ensure that the system is "fairer and more affordable" and is part of a package of deficit reduction measures that includes £12bn in welfare cuts overall.
Crucially, the government also claims to have more than mitigated the tax credit cuts for most people. Its own numbers at the time of the budget said eight out of ten families would gain by 2020 as a result of an increase in the minimum wage for those over the age of 25 and cuts to their income tax bills, through ongoing increases to the minimum earnings threshold at which the tax applies.
Around 3.2 million people will face cuts to their tax credits of an average of £1,300 from next year. By 2020 the average person on the so-called national living wage will be around £2,300 better off from a combination of the new lower pay rate and the tax changes. Add in the increased free childcare the Conservatives have promised and Osborne says that as many as nine in ten families will be better off.
What the opposition says
First, many dispute these numbers – and say the averages quoted cover up some pretty brutal cuts for the worst hit. The Guardian points out that the government has so far refused to publish a full impact assessment of the changes and this has led to accusations it is trying to hide the true impact of the reforms.
If the government's figures are right, then even it has to acknowledge that one in ten people near the bottom of the income ladder are going to lose out.
Younger people who will not benefit from the changes to the minimum wage are also thought to be vulnerable, although Osborne points to a number of employers already offering new pay deals to all workers in response to his reforms as evidence that they will also be protected.
Finally, there is the small matter of the gap between when tax credits are cut next April and the changes from other measures that will be felt in full by 2020.
Labour MP and chairman of the Commons Work and Pensions Committee Frank Field says this alone amounts to a "dive-bomb attack on Britain's strivers".
The reality
One major problem for the government is that it has lost control of the political narrative. Those losing tax credits will get a letter shortly before Christmas that outlines the cuts, but which will not make clear the fiendishly difficult calculations to work out whether they gain or lose overall.
If they're over 25 their minimum wages will rise from £6.70 to £7.20 an hour, while they'll gain £80 next year from the first £400 increase in the income tax personal allowance. But they will only see, in black and white, how much money is being taken away.
According to the Observer, 71 Conservative MPs won in May with majorities smaller than the number of families in their constituency who will see their tax credits cut.
This explains the pressure rising on Osborne from within the party and which could yet bubble over.
Even if the government can prove its figures, it still needs to explain why it is taking no action to protect the one in ten families who will lose out overall – or why it is not bringing in the changes at the same pace as the phasing in of offsetting measures to prevent a painful short-term hit.
Will the government change course?
Many observers reckon the government will eventually make some changes. Even the former international development secretary and Conservative chief whip Andrew Mitchell has hinted at "tweaks" to deal with the areas of the policy on which it is vulnerable. Any such watering down would be most likely to come at the spending review in November.