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

Like this article? Sign up to Left Foot Forward's weekday email for the latest progressive news and comment - and support campaigning journalism by making a donation today.