George Osborne should abandon his planned cuts to tax credits and look for the £4.4bn in revenue elsewhere, according to the Resolution Foundation.
The thinktank was one of the first to warn of the political damage cuts that tax credits could inflict on the chancellor if he pressed ahead with the timetable set out in the summer budget. It has been looking for an alternative way for the cuts to proceed in order to mitigate the effects and has concluded that there is no effective way of simply tweaking the cuts. It instead proposes changes to taxation thresholds and pensions in an attempt to find the £4.4bn.
The foundation warns that phasing in the cuts would still leave 2.7 million families worse off and only shift the burden towards the end of parliament. It also cautions that transitional arrangements such as only imposing the cuts on new tax credit claimants will save very little and will undermine the universal credit scheme by creating perverse incentives to work.
The thinktank will present its findings on Thursday morning at a cross-party conference where Frank Field, the chair of the work and pensions select committee, and the Conservative commentator Tim Montgomerie will be present. Its conclusions will place additional pressure on Osborne and make it more likely that he will have to perform a U-turn.
David Cameron said at PMQs that a solution will be presented by the chancellor in the autumn statement in three weeks’ time, but refused to say if the changes would leave people worse off. There have been suggestions that the government is looking to raid the universal credit budget further to fund a reversal of tax credits, to the possible effect of undermining universal credit’s purpose to make work pay.
Under current plans, 3.3 million working families are set to be worse off by an average of £1,100 from next April – despite an above-inflation increase in the personal tax allowance and the new national living wage. The planned cuts were blocked by the House of Lords, prompting the chancellor to say he would look at “lessening the impact of families during the transition”.
The report says the reduction in the earnings level at which tax credit entitlements start to be tapered away – set to save £4.4bn by 2020 – should not go ahead. The foundation says pushing ahead with this change, even on a revised timetable, would be a mistake, particularly when the same savings can be made elsewhere.
The report sets out alternative ways to raise the necessary £4.4bn:
- Increasing the personal allowance in line with inflation, rather than accelerating it towards £12,500, raising £4.9bn by 2020.
- Increasing the basic rate of income tax limit to rise in line with inflation, rather than accelerating it so the higher rate threshold reaches £50,000, saving £1.3bn by 2020.
- Reversing the increase in the inheritance tax threshold and cuts to corporation tax saving £3.4bn by 2020.
- Scaling back the over-indexation above earnings of the state pension from the last parliament by limiting pension rises in this parliament, saving about £6bn.
- Returning spending on tax reliefs to 2010 levels by 2020 – and thereby reducing the UK’s current £100bn spend on about 1,000 different reliefs, which would save about £10bn.
The foundation notes that the first two income tax pledges, for which more than four-fifths of the gains go to the richest half of households, are set to cost roughly £6.2bn, and it would be possible for the government to temper these. The move would also provide more support for those on low to middle incomes and help around 1.8 million low earners who pay national insurance but not income tax. This approach would be significantly less damaging to work incentives than taking more money out of universal credit.
It adds that the chancellor could cancel the planned cuts to tax credits without any revenue raising measures and still meet his two main fiscal objectives of debt falling as a proportion of GDP and a £10bn surplus by 2019-20.
Further pledged increases in the national living wage and the personal tax allowance will do relatively little to offset tax credit losses over the course of the parliament, with at least 2.7 million working families still worse off in 2020, the report says . The analysis acknowledges that while using transitional protection – applying the tax credit cuts only to new claimants – would reduce the number of losing families substantially, it would drastically slow the pace of savings to the exchequer. This proposal would significantly undermine universal credit’s goal of boosting work incentives and create a strong disincentive for families to work or earn more and move off tax credits. They would face a huge financial penalty should they need to return to claiming benefits at a later date following a job loss.
David Finch, senior economic analyst at the Resolution Foundation, said: “If the government is serious about providing more help to working families, its only option is to reverse the cuts. Fortunately, there are plenty of ways to fund this move – such as cancelling tax cuts targeted at better off households. And with a surplus of close to £12bn pencilled in for the end of the parliament, the chancellor can afford to cancel the tax credit cuts and still eliminate the deficit.”
