Nowhere to go on tax credit cuts

The work and pensions select committee asked the Resolution Foundation and the Institute for Fiscal Studies about the options available to mitigate the effect of tax credit cuts. According to the FT, Torsten Bell and Paul Johnson told them there aren’t any. This bit made me laugh, especially the last paragraph:

Frank Field, a veteran Labour welfare reformer who now chairs the committee, suggested that a delay might give people “more time to scramble around to try to mitigate the consequences” by raising their working hours.

However, Mr Johnson argued that rules under which people receive tax credits if they work 16 hours a week for a single parent, or 24 hours a week for a couple, meant there was little incentive to work longer.

Mr Field argued that the changes to tax credits might amount to “shock treatment” and that people “might just cast themselves adrift from the earnings rule” and seek longer hours regardless, given the size of the losses, “if employers had the work to offer”.

But he added: “I am slightly depressed by the answers you are giving.” The committee had hoped to hear options for mitigating the tax credit changes “and you seem to be telling us it’s all hopeless”.

I’ve worked with people like that. You give them the facts and they shout back, “Wrong answer!”

And the facts are that the government doesn’t really have anywhere to go. The Lords have asked it to reconsider but, as Stephen Bush says, if it wants to keep its pledges not to raise taxes, cuts pensions or run a deficit after 2019-20, it has to cut in-work benefits.

What really surprises me about all this, though, is the surprise.

That any of this should come as a shock to MPs or journalists is a pretty poor show. Anyone with a calculator, a rudimentary grasp of the welfare system and half-an-hour spare to read the OBR’s report should have spotted this months ago. By the time George Osborne promised to take £12 billion off the cost of social security, David Cameron had already promised to protect pensions. It was therefore quite clear that cutting an eighth of the working-age welfare bill would have to hit in-work benefits. If I, as a rank amateur, could see it eighteen months before the budget, so should the people who are paid to understand this stuff.

Part of the problem is the persistent idea that welfare is only paid to people who are out of work. It was this comment in the Telegraph over two years ago that started me banging on about this in the first place.

Several ministers have begun to openly question why the welfare bill is still rising, as unemployment has fallen by about 200,000 since the general election.

If so, a lot of government MPs clearly thought welfare costs were a function of unemployment.

That hasn’t been the case for years though. A report by the Resolution Foundation earlier this year showed just how out-of-date that view is.

Screen Shot 2015-06-08 at 12.11.53

As Gavin Kelly said:

[T]he UK’s longstanding problem of workless families has been transformed since the late 1990s: once viewed as the biggest social ill facing the country, the rate of worklessness in households in which there are no disabled adults has plummeted.

Welfare policy – and ministerial rhetoric – are yet to catch up with this.

The downward trend in the proportion of adults on out-of-work benefits started towards the end of the last Conservative government and has continued ever since. It’s a story that is now twenty years old. Over the last two decades, the welfare system has shifted away from paying people who are not in work and towards paying them to take jobs, even though those jobs might not pay enough for them to live on. This has, as Ben Chu shows, almost certainly mitigated what would otherwise have been a steep rise in inequality. It has also meant that spending on tax credits has steadily increased. After pensions, tax credits now account for the largest proportion of welfare costs.

Screen Shot 2015-05-28 at 12.47.07

Chart by Institute for Fiscal Studies

There is, then, no way of taking £12 billion from welfare without hitting in-work benefits, unless the Chancellor wants to do something even more unpopular like hit the disabled more severely than he already has.

It’s difficult to see how much of this is think-againable. The numbers just don’t add up. If the government insists on cutting the deficit by 2019-20 and is so adamant about not raising taxes that it’s talking about making it illegal, the only way to mitigate tax credit cuts is with even bigger cuts to public services. As Stephen says, the government has boxed itself in. Its dilemma is the same as it ever was. Having closed off all its other options, it has a straight choice between cutting benefits or cutting public services, neither of which will be popular.

Public Spending Venn 2015 v2 - Plain

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3 Responses to Nowhere to go on tax credit cuts

  1. It is not as though there is extra millions of hours available that the current million(s) unemployed cannot fill.

    How can they when the current favourite job is with the ‘zero hour’ contract – were employees cannot rely on a steady income to pay important bills – with not even a minimum hours guarantee.

    The Tories recently said they are the “workers party” which was obviously a lie – perhaps this is what they really meant – everybody has to work – or else condemned to live in poverty.

    More recent propaganda is: “The Conservatives have become the party of equality”.

    Sure – like they are the workers party.

    They LIE about bringing inequality down.

    I wrote this many times before – I wish the news media will take government to task about their lies so I can rest.

    The ONS and government use the Gini coefficient as a measure of inequality – but it is a statistical confidence trick to hide ever growing inequality between a countries powerful rich families from the rest of population.

    The truth is the reverse of what they say – incomes diverge – the poorest are still in poverty – you and i getting slightly more – the rich getting compound rises of up to 30% year on year into an annual fortune.

    Not one single professor will admit the truth about the Gini – they do not want to admit to having been an idiot all of their working life – surprise.

    And yet – if the government asked them to measure weight problems in the UK by ignoring the top 10% (including the grossly overweight) and bottom 10% (including the skinniest) they would say government was trying to hide the problems of the obese and dangerously underweight.

    However, that is basically how they measure inequality with the Gini coefficient – ignore the richest and poorest groups – those millions of people most affected by what is being measured.

    This is demonstrable fact – not opinion.

    IN FACT – the UK Statistics Authority actually admitted to me the Gini “is not ideal if your particular interest is in inequalities at the top or bottom of the spectrum”. This is the first time I heard they disclosed the fact they know it is “not ideal” for showing the inequalities of the rich or poor.

    Corrado Gini would have also known all this in 1912 when he made his formula – unless he was a terrible mathematician. This was always a con job on the general population.

  2. Luis Enrique says:

    Hell Rick, did you see this?

    http://www.niesr.ac.uk/blog/there-smarter-way-cut-tax-credits#.VjDAp7fhC70

    (apologies if you linked to it, and I missed)

    does that count as an option for mitigating impact?

  3. Pingback: Constitutional ‘crisis’ | Alex's Archives

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