Tax Credits cuts now uncertain

27 October 2015

fight_club_soapThe tax credit argument has been rumbling on for some time, with everyone except MPs it seems having some issue with the plans to cut tax credits put forward by Chancellor George Osborne in his summer budget. In a shock move the House of Lords have now forced George to "lessen" the impact of tax credit cuts on families and to provide some kind of "transitional help" for those affected.

Mr Osborne, during Treasury questions, said: "We will continue to reform tax credits and save the money needed so that Britain lives within its means, while at the same time lessening the impact on families during the transition."

The savings from his plans totalled £4.4bn, so he’s going to have to find a more palatable way to save the cash when announced revised and softened plans in his Autumn Statement due at the end of November.

How will it affect me?

Under George’s plans, the income threshold for receiving Working Tax Credits and Child Tax Credit was due to be dramatically cut from April next year, along with a sharper rate of reduction in credits once the income threshold was reached.

Plans were criticised as they affected mainly those working but at low rates and the plans were such that low-income workers were facing losing £1,300 a year, which is a considerable sum when you don’t actually earn very much.

While the Chancellor would have time to draft new legislation to accompany his Autumn statement, and get it passed into law (assuming the Lords do not intercede again) ahead of the scheduled April 2016 date for changes, it is likely that anyone affected will see at least a softening of the severity of the changes, together with some kind of transitional help to protect those for whom tax credits are crucial- at least until the new living wage has its intended effect for lower income workers.

Why is it such a big deal?

As part of a gentlemen’s agreement, established as a principle in 1911 during the constitutional gridlock that followed a decision by peers to block the Liberal Party's "people's budget", the Lords do not interfere with financial matters that have been agreed by MPs. The tax credit changes have been approved by the commons three times, owing to the Government’s majority, which is sorely lacking in the House of Lords. However, a gentlemen’s agreement only works if both parties believe the other to be acting in a gentlemanly manner. Here, the government was convinced the Lords would sit quietly and the Lords felt the government had not duly considered all the relevant impacts.

Part of the problem is that the Tax Credit changes were not included in a Finance Bill, which gets debated and allows time and opportunity for tweaking of legislation, but was instead pushed through as an unamendable take-it-or-leave-it statutory instrument. And the Lords left it, with two motions passed which will force the Government to delay the cuts until an assessment of their financial impact is carried out, as well as implementing provisions that will provide financial redress to the millions of tax credit claimants who will be affected when their entitlements are reduced.

Now, of course, the Government is livid with the Lords, claiming that is is unconstitutional for an unelected body to overturn decisions of the elected body of MPs. No comment was made on the constitutionality of electoral promises that are subsequently welched on. In any case, both David Cameron and George Osborne are of the opinion that the Lords need to be “dealt with” for daring to overturn their decision.

But what do you think? Are the delay and adjustments to the cuts a good thing or a bad thing?

TOPICS:   Government   Tax

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