Issues

Osborne’s climbdown?

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News of the Chancellor of the Exchequer, George Osborne’s decision to scrap his proposed tax credit changes were greeted with much cheer last December but agendaNi asks, has the announcement really changed anything?

At the end of last year, the Chancellor of the Exchequer, George Osborne stood at the despatch box to deliver his autumn statement. To the surprise and relief of many, the Chancellor decided to scrap his highly contentious tax credit changes. The proposed changes would have left many low paid families in a precarious financial position come April.

Many will see this as a defeat for the Chancellor, who was effectively forced into the decision to rethink plans to cut tax credits that currently cost the government around £4.4 billion. Tax credits are paid to low earning families as a means of making work pay.

 

A lucky position 

With the official state of the United Kingdom’s books improving remarkably in just a few short months, Osborne has found a stroke of unexpected luck. Not only has he been able to step back from slashing tax credits and police budgets but he will also use his theoretical windfall to cut the speed at which cuts are made to government spending. 

However, critics warn that despite this positive announcement the cuts to tax credits have simply been delayed to 2018, with no mention made of any planned revision to the budget set aside for the system that will replace tax credits, universal credit.

Universal credit

Those hit hardest by the new universal credit rules will be lone parents, disabled people and couples with children who rent their homes rather than pay a mortgage. Currently, the rules allow lone parents to earn up to £8,800 a year before their universal credit starts to reduce. This threshold is still set to reduce come April, when the amount of income allowed before a reduction in credit will plunge to £4,800. 

This drop will result in the net income of a lone parent being reduced by £2,600 a year. Disabled people will see a drop of around £2,000, while couples with children and no mortgage will lose around £1,000. If the Chancellor had pushed ahead with his tax credit cut, a couple who both work full time earning £20,000 per year with two young children would have lost £1,400 a year. Following this announcement, they are likely to be £160 a year better off. However, if they find themselves on universal credit which the government hopes, will have fully replaced tax credits by 2020, they will still find themselves £1,030 a year worse off.

Universal credit is the government’s main welfare reform plan and will bring together six working age benefits into a single monthly payment. In October 2015, 141,000 people were already claiming universal credit with the treasury expecting 330,000 claimants to be using the scheme by 2016/17. However, it has been beset by problems since its introduction. In 2011, then Work and Pensions Secretary, Iain Duncan Smith claimed a million people would be in receipt of the benefit by April 2014 and he envisaged that all 7.7 million households that are currently in receipt of financial support, would be on it by 2017. These targets will not be met with the Treasury recently admitting that the latest schedule will see universal credits fully implemented by 2020/2021. 

A spokesman for the Treasury confirmed that universal credit has been substantially delayed on at least three occasions in the past three years with the rollout now three years behind schedule. The Office for Budget Responsibility revealed that the department has built further delays into the roll-out. These delays are costing the government money as the government has to pay the legacy benefits and is missing out on the savings provided by the change to universal credit. 

Smoke and mirrors

The Institute for Fiscal Studies’ economics researcher, Andrew Hood agrees with many other observers who claim that the announced tax credit cut is simply a game of smoke and mirrors. Hood highlighted the fact that lots of other benefit cuts announced in July are still going ahead as planned.

Hood claimed that despite the decision to scrap two planned cuts to tax credits, the u-turn will have no long term economic benefit thanks to the implementation of universal credits. He also noted that deep cuts to working age benefits are still planned and will affect low-income working families.

Hood presented a chart showing that the impact of the post-election tax and benefit changes by the Chancellor on families in the lower half of the income distribution in 2020 was virtually identical both before and after the autumn statement announcement on tax credits.

“The Chancellor is going to need his luck to hold out.

He has set himself a completely inflexible fiscal target”

The director of the IFS, Paul Johnson was quick to shrug off suggestions that this spending review signalled the end of austerity and warned that total managed expenditure is still due to fall from 40.9 per cent of national income in 2014-15 to 36.5 per cent in 2019-20. This will result in large real terms cuts for a swathe of departments. Though he did agree that the spending review means the cuts will be less severe than those planned in July.

“The Chancellor is going to need his luck to hold out,” said Johnson. “He has set himself a completely inflexible fiscal target of having a surplus in 2019-20. This is not like the friendly, flexible fiscal target of the last parliament which allowed him to accept a bigger deficit when growth and tax revenues disappointed. This is fixed four years out.

“The forecasts will change again, and by a lot more than they have over the past few months. If he is unlucky, and that is almost a 50-50 shot, he will have either to revisit these spending decisions, raise taxes, or abandon the target. Abandon it is just what the Chancellor has done with his self-imposed welfare cap. He won’t keep to it in any of the next three years. In the long run, though, the tax credit change has little effect on the public finances because the cuts to universal credit announced in July are unaffected. 

“Previous governments have also failed to sort this out when there has been plenty of money around. It will be harder to make changes when money is tight. It is to be hoped that this government will be more successful than its predecessors in effecting rational reform.”

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