Experts think George Osborne is wrong on the impact of slashing tax credits

The IFS has called the chancellor's optimism 'arithmetically impossible'


Speaking to Mishal Husain on Radio 4’s Today programme, chancellor George Osborne insisted this morning that working families would be better off as a result of his planned changes to tax credits:

“The typical family with someone working full-time on the minimum wage will be better off, not just a little bit better off but over £2000 better off.”

But shadow Work and Pensions secretary Owen Smith warned today that the cuts would be ‘an insult to working people’ and would leave families dreading news of slashes to their income before Christmas.

Smith may not be an impartial commentator, but it’s worth remembering that the independent Institute for Fiscal Studies (IFS) said in July that it would be ‘arithmetically impossible’ for the new higher minimum wage to compensate fully for the losses felt by recipients of tax credits.

Paul Johnson, the IFS’s director, pointed out after Osborne’s summer Budget that the gross increase in employment income from the higher minimum wage would be about £4 billion, but welfare spending as a whole is due to fall by £12 billion. Even excluding the effects of the four-year freeze, tax credit spending is due to be cut by almost £6 billion.

Labour has also highlighted today that in the Tories’ 25 most marginal constituencies 130,000 working families will be hit. In the Welsh constituency of Gower for example, where Byron Davis has a majority of just 27, 3,600 working families receive tax credits. In Derby North, where Amanda Solloway has a majority of 41, 5,800 families will be affected. Countrywide, about 3 million families will be affected by the changes, due to come into effect in April 2016.

Speaking ahead of his conference speech today Osborne appeared full of confidence, but tax credit changes have also caused tension within the party. Tory MP David Davis told The Sun today: 

“The government needs to look at this again. For three million families losing £1,000 doesn’t mean cancelling your holiday, it means an empty pantry. I hope this doesn’t turn out to be our Poll Tax.”

And on Saturday former Tory minister David Willets warned that:

“When the reductions in tax credits start hitting purses and wallets next April there is a real risk that it could turn sour as some of those hard-working families that politicians love realise they are heavy losers. Too many people will see their work incentives fall.”

Playing on the security riff that has become his trademark, the chancellor said today that ‘working people of this country want economic security. The worst possible thing you can do for working families is to bust the public finances and have a welfare system the country cannot afford.’

Osborne has rejected the estimates of the IFS outright and refused to back down on the cuts. He has cited increases in personal allowances and improvements in childcare along with the new National Living Wage as compensating factors which will, he believes, leave working families £2,000 better off. The IFS predicts that families will be left £1,090 worse off.

This uncertainty will make for an uncomfortable few months for the families affected.

Ruby Stockham is a staff writer at Left Foot Forward

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16 Responses to “Experts think George Osborne is wrong on the impact of slashing tax credits”

  1. Roy

    The UK has just 1% of the world’s population and its GDP represents 4% of the global economic output, but the country spends 7% of the world’s welfare spending. This is an unsustainable position. Welfare has to be cut.

  2. Timothy Rawlinson

    false info, if you slashed all welfare it wouldnt solve shit

  3. lambdoid

    Expressing the UK’s economy as a percentage of the rest of the world is ridiculous. Your argument is based on faulty reasoning. You can only express the sustainability of the UK’s welfare budget in terms of the UK economy. There are more than enough economically productive individuals to sustain the non-economically productive ones at the moment, but this may change in the future.

    The real issue isn’t the government’s indebtedness- it’s private indebtedness. Cutting government spending increases private indebtedness. The sectoral balances equation shows that a public budget deficit is equal to private savings as there is a net flow of money to the private sector. Conversely, a public budget surplus leads to the net flow of money from the private sector to the public sector, which means that the private sector will be in net debt. Private indebtedness is certainly not sustainable, and will ultimately lead to a recession as private individuals and businesses can no longer borrow any more(they can’t print money, unlike the government), and won’t be able to spend more to keep the economy afloat, leading to job cuts, house repossessions, and increases welfare spending. Welfare is a means to maintain demand in the economy when the private sector can’t provide enough jobs. Cutting welfare means that the businesses that depend on people on welfare eg local shops will have to cut jobs, leading to more people on welfare and fewer people able to buy stuff, which is stupid.

  4. Bill Kruse

    Really? Can you explain why welfare has to be cut? Bet not… 🙂

  5. Eric Christison

    What do you class as welfare? If you’re including old age pensions then you’re including the largest part of our welfare expenditure.

    Anyway, I’m quite proud of the fact that we have a (more or less) functioning welfare system and has had for many years. Your assertion that it’s unsustainable defies the evidence.

  6. Harold

    Who are you going to target? The rich and powerful or the poor? Do not kid yourself it is only the poor and undeserving who benefit and I mean benefit from our welfare state it is also those who can pay who have power and can cope, are we going to ask them to share the burden or are we perhaps too frightened to lose their vote?

  7. DaveJones

    Pensions are not welfare.

  8. Jerome Orff

    Nonsense. This is a shameful abuse of statistics. Have you any idea of the cost to a modern economy in creating a permanent underclass? Small wonder Ossie is championing China and America… we should be more like those “hard working” countries… in that case we do need to hurry out of the European Convention on Human Rights, because we will soon be ditching what remains of our good record. BTW – where do you suppose that cash “benefits” get spent? Hint: they do not buy second homes, yachts, or sunshine filled holidays abroad… so who ultimately gets the real benefit of this largesse and then pays some back to HMRC as a proportion of Taxation?

  9. Jerome Orff

    Exactly. Well said. Now you too will gain the label of loonie leftie. This is how it is taught in business schools all over the world. Every MBA knows this. Yet the media soundbite machine would chew you out and spit all over this view like it represents some ultimate sin.

  10. Jerome Orff

    I would love to hear a reasoned argument, but I am 95% sure that it will not be forthcoming. These are just the machine-like drone of our noisy media spin factory, repeated until tired brains (belonging to millions of VERY hard working folks holding down 3 jobs) start to assume that they must be true.

  11. Jerome Orff

    Depending on what you want to solve? Tory endgame? They want a superclass like China and the USA, with themselves at the top, and the 99.9% at the bottom struggling even to stay out of debt while working 3 jobs. No worries about social unrest – we have drones already, and like Obama, we can pass laws to make them legal for use against UK targets on our own streets. GCHQ can already switch on your phone, then activate the microphone and the GPS (just read Snowden) – so consider the drift of history since 60’s… and then fast forward another 50 years. Do you think the steady destruction of Unions in the UK is only a blip in history? It is part of a longer term strategy. This IS in fact Class Warfare – and the attack on every mention of that fact as if it is some “conspiracy theory of the far left” is very standard pseudo-liberal spin used by the elites with great effect for decades now.Tories are just re-incarnated slave traders. Join the next demonstration – we can only stop all this by acting together!

  12. Dave Stewart

    I couldn’t give a damn what Osbourne believes. If he is so confident that no one will lose out lets see his working out. It make me incredulous when politicians simply flatly refute an independent organisations analysis but refuse to provide any evidence for the refutation. If we had a decent media they would call him out on this and show him up for the lying little worm he is.

  13. Dave Stewart

    I agree mostly with what you have said except one little albeit very important detail.

    Private banks create around 97% of the money in circulation through the action of creating loans. So the private sector can and does “print” money. The problem arises when it is no longer possible to service the interest on these debts which have created this money. As there is no limit whatsoever to the amount of debt private banks can make it is possible we will find ourselves in a situation where it is literally impossible to service the interest on this private debt. This will basically become a repeat of 2008.

  14. Silvia Vousden

    Pensions are counted as welfare for all the national budget calculations, just as it was in the ‘breakdown’ sent to every household in the country. Public sector pensions were included in the Welfare section of that presentation, probably to imply that a larger proportion of the budget is devoted to welfare than is actually the case. Less than !% of the national budget goes on unemployment for example, some £4.5 billion. Vodafone was given a tax break of £6 billion, more than paid out to Job Seekers and ESA claimants. State pensions were separated from the overall calculation. My old teacher would not like to think the government believes the pension she earned during her teaching career is considered as ‘welfare’, but for the purposes of government propaganda it is.

  15. Silvia Vousden

    If you cut all welfare, then many of those enjoying government subsidies to conduct business here would go bust. We as a nation spend £95 billion on corporate welfare. Mortgage Interest relief would have to be stopped, increasing house repossessions, people in low paid jobs will have the stark choice of heating or eating, or giving up both to keep a roof over their heads. Local authorities would have ever increasing numbers of homeless to deal with. Oh yes, that’s right, because of the cuts to welfare already made, homelessness has gone up by 45% (Shelter), and 1 million people are using food banks (The Trussell Trust). I hope this DOES become this administration’s Poll Tax, because then people would have the sense to never vote Tory again in their lifetime.

  16. Eric Christison

    42% of Government welfare spending is on old age pensions.

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