What is the government doing?
The Treasury is proposing cutting the income thresholds for tax credits – that’s the amount of money you can earn before your tax credits begin to be withdrawn.
If a new piece of legislation is passed, people will start seeing their Working Tax Credit reduced after they earn £3,850 instead of £6,420. The Child Tax Credit threshold will fall from £16,105 to £12,125.
Once households reach the threshold, the credit will be removed at a faster rate – by 48p in the pound instead of 41p. And the amount of extra income you can earn in a year without affecting the payments is being cut from £5,000 to £2,500.
There is no transitional protection to soften the blow for people who will see their benefits cut.
The proposed changes come on the back of other reforms to benefits and tax credits already voted through in the summer Budget and the Welfare Reform and Work Bill.
Why?
The moves will save the taxpayer about £4.4bn in 2016-17. The Conservatives say tax credit spending had become unsustainable and needed to be reined in.
The independent Institute for Fiscal Studies (IFS) agrees that the bill for tax credits increased rapidly under Labour – in fact in went up more than four-fold between 1997/98 and 2010/11 in real terms, from £7bn a year to more than £30bn a year.
Having said that, the IFS also found that real-terms spending on tax credits flat-lined over the last parliament.
And it predicted that total social security expenditure as a share of national income would fall over this parliament, before the summer Budget, raising doubts about whether welfare spending was really “unsustainable”.
This government says the changes are part of a wider strategy of moving “from a low wage, high tax and high welfare society to a high wage, lower tax and lower welfare society”.
Did the Tories mislead voters before the election?
Ministers have said that the Conservatives were upfront with voters about wanting to slash Britain’s benefits bill.
But there was no specific mention of tax credits in the party’s 2015 manifesto.
In the party leaders’ edition of Question Time just before the election, an audience member asked David Cameron if he would “put to bed rumours that you plan to cut child tax credit and restrict child benefit to two children”.
He replied: “No. I don’t want to do that. This report that was out today is something I rejected at the time as Prime Minister and I reject it again today.”
Asked if the child tax credit payment was going to fall, Mr Cameron said: “It’s not going to fall.”
In a BBC Today interview this morning the Cabinet Office minister, Matthew Hancock, offered a technical defence of this, saying: “The level of tax credit is not being changed.”
It’s true that the maximum level of award payable is not going to fall, but the number of people eligible for tax credits will shrink, and the payments will be less generous for many claimants.
Government documents say that from 2016/17, five out of 10 families with children will be eligible for tax credits as opposed to nine out of 10.
Who will lose out?
The big question. This is where the confusion comes in – some of it, perhaps, deliberate.
Mr Cameron and Mr Osborne have come up with examples of households who will gain from all the changes. It’s always possible to construct these examples, but they are not representative of all claimants.
There’s no real dispute that the average tax credit recipient will lose out, although it’s hard to be exact about who will lose or gain how much, since different families will be affected differently according to their specific circumstances.
The House of Commons Library says: “The average impact across all affected families can be roughly estimated as a reduction in the tax credit award of around £1,300 in 2016-17.
“The actual impact will vary from family to family however; some will lose more than this amount, others less. Some families will lose entitlement to tax credits completely.”
The government insists that some of its other big fiscal policies will offset the drop in income many tax credit claimants will suffer.
But again, there is some muddying of the water here.
This morning Mr Hancock said: “By next year, eight out of 10 people will be better off” when you balance the tax credits changes with giveaways like a more generous living wage, an increase in the income tax threshold and extended hours of free childcare.
This is consistent with official analysis published alongside the summer Budget, which says 80 per cent of households will be better off, by £130 on average.
But this is 80 per cent of ALL households in the country, not just people claiming in-work tax credits. Most families don’t claim them, so they won’t suffer from the cuts.
And it’s worth remembering that the tax credit changes kick in next year, but the full effects of the uprated minimum wage and tax threshold won’t be felt until the end of this parliament.
Of the 3.3 million or so working households who do claim tax credits, the independent concensus is that more will lose than will gain.
Today the consultancy Policy in Practice published new research suggesting that only 34 per cent of people receiving Working Tax Credit would be better off.
It said the cumulative impact of all policies in George Osborne’s summer Budget was to double the cuts in income for low-income families, compared with measures that had already announced.
IFS director Paul Johnson has said “unequivocally” that tax credit recipients in work would find themselves worse off after all the summer budget measures were taken into account.
And the TUC, using a similar tax and benefits model to the IFS, found that low-income working families would be the hardest hit.
“When the tax credit cuts hit families next year, the direct financial loss to working families in the poorest quintile will be £560 a year on average and those in the second poorest quintile will be made £670 worse off.
“By contrast, working families in the richest quintile will lose only £10 on average.”
