Tax Credits – what’s the issue?

As the House of Lords prepares to debate the government’s controversial tax credit changes today, Left Foot Forward goes back to the beginning to explain the basics


As the House of Lords prepares to debate the government’s controversial tax credit changes today, Left Foot Forward goes back to the beginning to explain the basics.

What is the government proposing and why?

In his summer budget, the chancellor announced that from April 2016 the level of earnings at which a household’s tax credit awards start to be withdrawn for every extra pound earned would fall from £6,420 to £3,850. The government also announced that:

  • The rate at which a person’s or household’s tax credit award is reduced as they progress into work will increase by raising the taper rate in tax credits from 41 per cent to 48 per cent.
  • Support for families through the tax credits system would be limited to two children, meaning any subsequent children born after April 2017 will not be eligible for further support. Furthermore, those starting a family after April 2017 will no longer be eligible for the Family Element in tax credits.

Ministers have argued that those families affected will be compensated though the establishment of a National Living Wage (NLW) and changes to the personal tax allowance.

The NLW for workers aged 25 and over will be introduced initially as a new premium on top of the National Minimum Wage (NM). From April 2016, the new NLW will be set at £7.20 – a rise of 70p relative to the current NMW rate, and 50p above the NMW increase that came into effect in October 2015.

The government will ask the Low Pay Commission (LPC) to set out how the new NLW will reach 60 per cent of median earnings by 2020. The Red Book notes that “based on the OBR’s earnings forecasts, this means that the NLW will reach the government’s target of over £9 by 2020. Sixty per cent of median earnings is in line with the approach suggested by Professor Sir George Bain, the first chair of the LPC, in a 2014 report on the future on the NMW.”

Ministers have also set a target to increase the personal tax allowance to £12,500 by the end of this parliament. As part of this, in 2016-17, the allowance will increase by £400 to £11,000.

The Red Book concludes:

“Taking the welfare changes together with the introduction of the NLW and record increases in the income tax personal allowance, this will mean that 8 out of 10 working households will be better off in 2017-18 by an average of £130.”

Do the experts agree?

Following the Budget the Living Wage Foundation questioned if the government’s plans amounted to a Living Wages at all. Rhys Moore, the Foundation’s director observed:

“The Living Wage is calculated according to the cost of living whereas the Low Pay Commission calculates a rate according to what the market can bear. Without a change of remit for the Low Pay Commission this is effectively a higher National Minimum Wage and not a Living Wage.”

The Institute for Fiscal Studies, in its post Budget briefing argued that just over 3 million families are likely to lose just over £1,000 each.

The IFS has also noted that the government’s planned Living Wage will not achieve what Ministers argue. As the IFS noted in September:

“If the NLW were to have no effect on GDP, employment or hours of work it would offset 27 per cent of the drop in household incomes from the impact of net tax and benefit reforms. In fact, as the Office for Budget Responsibility stresses, the NLW is likely to depress GDP and employment, and the money for it has to come from somewhere so this can be taken as a “better case” scenario, at least in the short-term.

“The new NLW offers such little compensation because the boost to gross wages is smaller than the announced fiscal tightening and almost one-third of the increase in gross wages goes to the Treasury in higher tax receipts and lower benefits and tax-credit entitlements.”

Does the government have a mandate for the changes?

No-where in the Conservative Party election manifesto for 2015 did it outline plans to make the changes to tax credits announced in the Budget.

During the election campaign itself, the Prime Minister appeared to rule out such changes during an exchange on the Question Time leaders special.

Questioned by a member of the audience David Cameron said that he did not want to cut child benefit or child tax credits if he won the election, but that it was possible to save more from the welfare budget.

Asked if this amounted to an “absolute guarantee,” he said child tax credit “would not fall” and child benefit was “one of the most important benefits there is” and did not need to change.

Does the Chancellor have the support of his own party?

Since the Budget, growing numbers of high profile Conservatives have attacked the changes and called at least for measures to mitigate its impact.

The Mayor of London, Boris Johnson has concluded that he feels “sure” that the Chancellor will come up with some way of protecting those on the lowest incomes affected by the tax credit changes.

The former government chief whip, Andrew Mitchell has called for tweaks to mitigate the worst impacts whilst the leader of the Scottish Conservative Party, Ruth Davidson has argued  that the tax credit cuts will cause unacceptable “suffering” for poorer families.

The voices of descent have also found their way among Conservative MPs newly elected in May. In her maiden speech last week Heidi Allan, MP for South Cambridge called on the government to rethink the policy. Ministers, she argued, were losing sight of the difficulties of working people in their “single-minded determination to achieve a surplus”.

Another of the new intake, the Conservative MP for Plymouth Moor View, Johnny Mercer told the Commons last week during an Opposition day debate on tax credits:

“I must urge caution with these changes to tax credits. It would be remiss of me not to recount the extraordinary levels of feeling in Plymouth. This bright, vibrant, exciting and predominantly blue collar city has serious objections to these tax credit reforms, and it is my duty to represent them.”

What will the House of Lords debate today?

The House of Lords will today debate the Regulations introducing the tax credit changes. They will, along with this get to consider 4 different motions which, in one form or another, will cause the government concerns.

The Liberal Democrat peer, Baroness Manzoor, will move a motion simply declining to give approval for the Regulations.

Crossbencher, Baroness Meacher will move a motion declining to give approval for them until the government provides a detailed responses to the IFS’s findings and considered possible mitigating action.

The former Labour social security minister, Baroness Hollis of Heigham will move a motion declining to give approval for the regulations until the government has properly consulted and reported to Parliament on measures to provide “full transitional protection for a minimum of three years for all low-income families and individuals currently receiving tax credits before 5th April 2016,” and provided a detail response to the IFS’s findings and considered possible mitigating action.

The Lord Bishop of Portsmouth will move a motion that whilst not killing the Regulations off would never the less express regrets that they “fail to take account of concerns about their short-term impact on working families and individuals currently receiving tax credits, and calls on the Government to consult further on the draft Regulations and revisit their impact.”

Is the House of Lords acting constitutionally?

Many within the Conservative Party have argued that it is unconstitutional for the House of Lords to seek to block a money measure that the Commons has passed.

It is true that the Parliament Act of 1911, following the rejection by the House of Lords of the 1909 ‘People’s Budget’ removed the power of the upper House to veto money bills. Technically however, the tax credit changes are being introduced as secondary or delegated legislation, known as a Statutory Instrument.

In 2006, a joint committee of MPs and Peers looking at conventions between the two Houses noted that:

“The Parliament Acts do not apply to delegated legislation. So delegated legislation rejected by the Lords cannot have effect even if the Commons have approved it.”

The Committee concluded:

“On the basis of the evidence, we conclude that the House of Lords should not regularly reject Statutory Instruments, but that in exceptional circumstances it may be appropriate for it to do so. This is consistent with past practice, and represents a convention recognised by the opposition parties.”

Ed Jacobs is a contributing editor to Left Foot Forward. Follow him on Twitter

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