The Prime Minister, David Cameron, in a speech delivered
in Runcorn yesterday began to reveal where some of the £12 billion cuts to the
welfare budget will come from. In what he called a ‘merry-go-round’ of tax and
benefits, he identified tax credits as one major area.
The Tories refused to say during the general election
campaign where welfare cuts would fall, so this is the clearest indication yet of
an area of the welfare budget to be targeted. Cameron went on to say:
“People working on the
minimum wage having that money taxed by the government, and then the government
giving them the money back, and more, in welfare. Again, it’s dealing with the
symptoms of the problem, topping up low pay rather than extending the drivers
of opportunity.”
At first glance, this seems to be a perfectly rational
position to take, where tax is taken from low earners and then returned to the
same workers via the tax credit system, appears to be an inefficient carry on. But
tax credits were introduced by Gordon Brown when he was Chancellor of the
Exchequer as a way of targeting money at the lowest paid and allowing extra for
any dependent children.
Typically Brown like, tax credits are incredibly difficult
to understand and are calculated via a computerised system where all of the
relevant data is fed in. Basically, if you earn the minimum wage or a little
above, you will qualify for tax credits, and if you have children you will get
extra.
Despite the complex calculations involved in tax credits
they are very good at targeting those on the lowest pay and boosting their
income via payments from the government.
Critics on the left have argued against tax credits as a
subsidy to employers to pay low wages, which is certainly the case. But at the end
of the day tax credits do get money to where it is most needed.
The Resolution Foundation, a think tank that works to
improve the living standards of low to middle-income earners, has
analysed proposals to cut the value of the ‘child element’ of the Child Tax
Credit back to its 2003/4 level, which it is rumoured the government intends to
do. It suggests that:
•Over two-thirds of
affected families would be in-work
•Families with two
children would lose up £1,690 a year
•Almost two-thirds of
the cut would be borne by the poorest 30 per cent of households
•Almost none of the
cut would fall upon the richest 40 per cent of households
In a report written even before cuts to child tax credits
were suggested the Institute for Fiscal Studies said that the number of children living in
poverty has increased again over the last three years, from 2.3 million to
2.5 million.
Government policy is set then to increase poverty,
particularly among those on low pay with children. This is denied by the
government, although their alternative route to ‘prosperity’ is only vaguely
explained.
Cameron instead said what he wants to ‘see is this move towards an economy with higher pay, lower welfare and
lower taxes rather than low pay, high taxes and high welfare’.
But there was no commitment to increase the minimum wage,
other than in line with inflation which is estimated to raise it to £8 per hour
by 2020. It should also be noted that the government plans to introduce
employment legislation to make it more difficult for unions to organise and to
take industrial action.
So, how will the government achieve this high wage economy
that the Prime Minister sees as the answer to cutting poverty? The invisible hand of the
market perhaps, or maybe the tooth fairy?
It appears to be wishful thinking at best, or a cynical
attempt at muddying the water on the issue at worst.
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