George Osborne, The Chancellor, has got himself into quite a pickle.
This week the Prime Minister and his deputy were defeated in their plan to save millions of pounds from the welfare budget by cutting tax credits. Because the Conservatives have a slim majority in the house of commons, the plans were passed through – despite vocal opposition from the SNP and some MPs from all other parties – but in order for those plans to become law, the House of Lords needed to agree too. In what some are calling an “unconstitutional” move, the second house – in which Tory peers are outnumbered by Lib Dems and Labour members – voted to delay the plans.
Was it unconstitutional?
Today the Government is trying to pass through a bill to put down in law that the Lords don’t have rights to reject any laws related to finances. It’s been a long held tradition – but not law – in the house that they have no right to reject financial plans supported by MPs. The reasoning goes back to 1911 when a law to be passed by the Liberal Party was opposed by the Lords. But could be considered as going back even further, to the Magna Carta and later the American doctrine of no taxation without representation. Tory MPs claim that the unelected house of Lords have no right to challenge changes to taxes on this basis. Though of course, their position may have been slightly different if they had more Tory peers…
The answer really lies somewhere in between. Much of British law is unwritten and unclear, so the government’s opponents claim that similar legislation (Statutory Instruments) have been rejected by the Lords before. There really is no right or wrong answer, but some have been calling for a reform of the unelected house of Lords for a long time, perhaps this is the spark which causes real and lasting change.
Are the Government breaking a promise on tax credits?
As with many pre-election promises, there are many contradictory stories concerning whether or not the Tories wanted to cut tax credits or not. According to Full Fact (a site aiming to clarify these sorts of arguments) Mr Cameron promised to keep Child Tax Credits, but never made any claims about keeping Tax Credits in general.
The government has consistently promised to cut the cost of welfare, and today Osborne reiterated that to the BBC by claiming that Tax Credits are “uncontrolled” welfare spending which the government needs to cut. In the interview he repeatedly says that the public support these cuts which seems a little odd considering the backlash he’s facing. But of course he means that the public voted for the Conservative plans, whether they read them fully or not…
So take a look at the 2015 Conservative Manifesto, is there a mention of the Tax Credits system being cut? Not a jot. There is plenty mentioned about the Labour system which rewarded doing the wrong thing (which here means being unemployed) and penalised for doing the right thing (working). It also mentions the introduction of Universal Credit which is designed to ensure that “work always pays”.
So whilst the Government hasn’t really broken any explicit promise on Tax Credits, they’re hardly sticking to their Manifesto pledge by cutting a benefit which is helping working people stay in work.
Just look at today’s newspapers to confirm that. Those often in support of the Conservatives have condemned Mr Osborne’s approach to changing the Tax Credits system. The Daily Mail says his approach is “flawed”, despite supporting cuts to the “ruinously wasteful” Tax Credit system, The Daily Express says a review is important because the current debacle does “a disservice to voters”; Times Deputy political editor Sam Coates says the delay gave Osborne an opportunity to “backtrack with dignity”; and even The Sun says “It is right the brakes were slammed on the Tax Credits cut… Support, not a ladder kicked away, was needed”.
Are tax credits a good thing?
This is probably the biggest question to tackle, because talking about broken promises and pledges really has no effect in the long run. But whether the country (and its people) will be better off with or without tax credits is a different and far more challenging question.
In brief, tax credits are designed to help support low earners to ensure they’re still in work but also are above the breadline. The IFS (Institute for fiscal studies, an independent body which scrutinises governmental economic policy) says that three million families will lose, on average, a thousand pounds a year if the cuts go ahead. Some families (mainly middle income learners) will benefit in the long term because of increases to minimum wages and personal tax allowance but many will be worse off.
If you were to stop the analysis there, cutting tax credits would be a travesty but looking a little closer it may not be such a terrible idea… even if the delivery has been a bit of disaster.
The problem with Tax Credits is that it artificially restricts wages, if the government is topping up wages then why would companies increase them? That means that the taxes of other workers are subsidising what business owners should be paying, which doesn’t seem quite right.
Even Alistair Darling, the Labour Chancellor to Gordon Brown’s PM, who introduced the idea, agrees that tax credits aren’t ideal. In a Channel Four Documentary on Inequality, he says “It’s actually not good for the long-term economics.”
He continues,” You know, if the state is making up the difference between what would be unacceptable and what is acceptable then the employer’s not paying it – now, that’s expensive for the state. I think it was a good policy when it was introduced because it was smoothing out some of the losses that people would otherwise make… That is not an argument for scrapping tax credits, it is an argument for making sure that you adjust the system. And it’s also an argument for making sure that we do our level best to drive up those level of wages – because, after all, people who earn more spend more. And that’s one of the reasons one of the ways the economy will start to recover properly.”
So even the architect of Tax Credits admits he may have been wrong. But of course, the problem here isn’t the benefits themselves being lost, but the replacement (ie bigger wages) not being introduced swiftly enough. It seems that Mr Cameron and his party have half of the right idea… but they’ve left out the bit which affects big business’s pockets, and left in the one which affects the little guys.