Possible reductions to tax credits

An e-mail popped into my inbox today from the campaigning group, 38 Degrees: George Osborne: No more kids in poverty. Please don't cut child tax credit I decided I need to have closer look.

The issue has been covered extensively in the media:

Tory welfare cuts would hit poorest third of UK families, research shows:
http://www.theguardian.com/politics/2015/jun/14/tory-welfare-cuts-would-hit-poorest-third-of-uk-families-research-shows
Cameron to hint at assault on tax credits in welfare speech: http://www.theguardian.com/money/2015/jun/22/cameron-hints-at-assault-on-tax-credits-in-welfare-speech
George Osborne considering £5bn cuts to child tax credits: http://www.bbc.co.uk/news/uk-politics-33089711

What is being proposed?

The proposal is to 'return the per-child element of child tax credit to its real CPI-adjusted 2003/4 level' [1]. But what does that mean in practice?

First, some basics.

• Working Tax Credit is available if you are in full time work (as defined by tax credits regulations), provided your income is low enough. 
• Child Tax Credit is available if you have children, again provided your income is low enough. 
• If you are in full-time work and have children you are potentially entitled to both. 
• If you (or your partner) are in full time employment, have at least one child, no child care costs, and provided no-one in the family is disabled, the maximum Working Tax Credit you can normally get is £4,780 (in the tax year 2015-16), and the maximum Child Tax Credit you can get is normally £545 plus £2,780 per child (the 'child' element). 
• So if you have two children the maximum total tax credit figure is £10,885 (£4,780 plus £545 plus two lots of £2,780)
• What you actually receive is then reduced by 41% of any income you have over £6420.

The government is proposing reducing the amounts for children. The figure of £2780 per child would be reduced to about £1935. They get this by taking the actual figure used in 2003-4 and then increasing it in line with the consumer price index (the increases have presumably been higher than the CPI in the past in an attempt to reduce child poverty).

What's the government's rationale? And what do I think about their logic?

1. If you support workers with in-work benefits you are, in effect, subsidising the businesses that employ them.
2. This is a Bad Thing
3. To remove this anomaly you reduce in-work benefits: workers' pay will increase accordingly
4. The best in-work benefit to cut is the child element of tax credits.

Part (1) is indisputable. Part (2) is arguable either way. 

Part (3) is that bit I, and, I suppose, most of the readers of this post, find particularly unconvincing. Here's some questions that come to mind:

• What will be the drivers of pay increases? Market forces? Strikes? Employer goodwill?
• Will there be sanctions for employers who don;t increase their wages? (Of course not)
• Will all employers increase their wages, or just some?
• How long will it take for the entire employment world to make good the shortfall (if ever)?

And what about Part (4)? Why pick on the child element? The likely, and logical, reason is that all the other elements of tax credits have been increased broadly in line with inflation since 2003: only the child element has been increased at a higher rate, presumably with the aim of reducing child poverty.

Of course this leads to an obvious objection: won't reducing the child element risk increasing child poverty? Er... Yes. According to the Child Poverty Action Group [2] 1.1 million children were lifted out of poverty between 1998/9 and 2011/12. However they also cite research from 2013 that projected that from 2012-13 child poverty would rise, reaching a 600,000 increase by 2015/16. These figures, which are obviously due for verification any time soon, are  unlikely to take account of the proposed reduction to the child element, as this has only recently been suggested. 

Furthermore, this change would affect all families with children on low incomes, whether they're in work or not (this hasn't been mentioned in the media coverage I've seen so far) A single parent on Income Support with one child under five years old, for example, would see their income reduced by £845 per year too (more than £16 per week). 

Where have they got this idea from?

The government appears to have taken this proposal for a suggestion made by the Institute of Fiscal Studies (IFS): Benefit cuts: where might they come from? [3] It's worth taking a look at.

Reducing the child element of Child Tax Credit is only one of the suggestions made by the IFS. It also highlights that it would be likely to increase child poverty by 300,000, and that, 'in the absence of much-needed clarity from the government on its child poverty strategy (and in particular its attitude towards the supposedly legally-binding 2020 child poverty targets) it is difficult to assess the coherence of such a policy.' 

One of the other suggestions they make is to abolish Child Benefit, and increase tax credits and Universal Credit accordingly so that the poorer are not worse off. The majority of families with children would lose about £1000, but it would be the bottom third (in income terms) who would be protected. 

Both suggestions would, the IFS estimates, save about the same amount of money: about £5Bn

I leave you to ponder the reasons for the government preferred choice.

Conclusion

In his speech today (22nd June) David Cameron said[4]: "There is what I would call a merry-go-round. People working on the minimum wage having that money taxed by the government and then the government giving them that money back - and more - in welfare". These look like weasel words to me: a false equivalency is being presented. What is actually happening is that people on the minimum wage are too poor to be paying much tax anyway. But they do benefit from government assistance  to bring their income to a liveable level. 

Yes, it would - probably - be better if those at the bottom of the pile were earning more, and didn't need government assistance. But they aren't, and I can see no way in which a reduction in tax credits will lead to a prompt and universal increase in earnings. It's not even as if the Conservative party has given more than lip service to the Living Wage.

(The Daily Telegraph has published a surprisingly thoughtful article: David Cameron wants to cut in-work tax credits, and wants companies to pay staff more. How can he do it? I don't agree with all their suggestions, but it's a useful contribution to the debate.)

So, yes, I'm signing the petition. You might choose to.

But beware: if this cut doesn't become law, another one will...

References

[1] 'George Osborne considering £5bn cuts to child tax credits' http://www.bbc.co.uk/news/uk-politics-33089711

[2] Child poverty facts and figures http://www.cpag.org.uk/child-poverty-facts-and-figures

[3] Benefit cuts: where might they come from?  http://www.ifs.org.uk/publications/7762

[4] Report by independent on David Cameron's speech, 22/06/2015 http://www.independent.co.uk/news/uk/politics/working-poor-set-to-face-cut-in-tax-credits-as-david-cameron-attacks-merrygoround-welfare-system-10335820.html