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”
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.
Timothy Rawlinson
false info, if you slashed all welfare it wouldnt solve shit
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.
Bill Kruse
Really? Can you explain why welfare has to be cut? Bet not… 🙂
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.