On 25 November chancellor George Osborne will declare his modifications (in response to the House of Lords vote on 26 October) of his tax credit cuts plans. He will do it together with his general annual Spending Review, in which he will announce cuts in other areas.
The tax credit cuts, unmodified, would take around £2000 a year away from a wide range of lower-paid workers with children. Jeremy Corbyn and the Labour Party are campaigning against the tax credit cuts. Three weeks remain in which to rally loud-enough protest to force Osborne to make more than minimal adjustments to his cuts. Labour — and the unions, too, which have largely left this campaign to the Labour Party — should organise protest on the streets as well as by e-petitions and the like. The campaign against tax credit cuts should also be a springboard to campaign for the “real living wage”, guaranteed by law, which shadow chancellor John McDonnell has promised.
Almost six million workers get less than the living wage, a rate calculated as the minimum necessary for workers to cover their families’ basic day-to-day housing, food, and clothing. The updated living wage rate for 2015-6, announced on 31 October, is £8.25 an hour, £9.40 an hour in London. It is way ahead of the legal minimum wage, which is £6.70 an hour from 30 September, and applies only to over-21s. While the numbers on less than the living wage have been rising, profits have recovered since the 2008 crash and company bosses’ pay has increased nearly four-fold since 2000. Overall, full-time workers’ pay has increased by less than 50 per cent over the same period. In 2000 CEOs earned 47 times the pay of the average full-time worker. Now they earn 120 times as much. As output and market demand have recovered a bit from the slump, although precariously, in some sectors workers have started getting real wage rises for the first time since the crash. Now is the time for a concerted union campaign to win living wages across the board.
Stop tax credit cuts
In-work benefits for the low-paid workers with dependent children reach back over forty years. Their earliest form was Family Income Supplement (FIS), introduced by Edward Heath’s Conservative government in 1971, but by the mid 1980s only around 200,000 low-paid families received it. This system was overhauled in Thatcher’s Conservative government, and replaced with Family Credit in 1988. That expanded through the 1990s. By 1999 Family Credit was paid to around three-quarters of a million families in the UK. The average payment (in 1996) was £3,000 a year (equivalent to £5,200 today). In its last year of operation in 1999, Family Credit cost around £5 billion (equivalent to £8 billion today).
In 1999 the New Labour government changed this system, initially with the creation of an interim measure, the Working Families’ Tax Credit. Fuller reform came in 2001-2003 with the creation of Child Tax Credit (CTC) and Working Tax Credit (WTC). The basic intent was social engineering to encourage unemployed people into low-paid work. The policy targeted lone parents, older workers and non-working mothers and encouraged them to work with allowances for childcare and special incentive payments. That goal, rather than belief in greater income equality, drove the policy. A second goal was to reduce child poverty. Although a small amount of WTC was available to people without dependent children, the overwhelming focus was on families with children. The bulk of the benefit went to families on less than £20,000 per year. As a recent report by the Institute for Fiscal Studies (Redistribution from a Lifetime Perspective) shows, the main redistribution involved is from tax-payers without dependent children to those with.
This can also be understood as redistribution over the lifetime of a taxpayer – receiving credit when they have children but paying more tax when they do not. CTC consists of a number of elements: a family payment of £545 paid regardless of the number of children; a payment per dependent child (more for children with disabilities); and help with childcare costs (although often too little to meet the full cost). WTC is a separate benefit for those on lower incomes, and is given in addition to the CTC and to those over 25 years old without children. Tax Credits thus became a much fuller system of benefits than the Thatcher-era Family Credit. They were squeezed rather than reformed under the 2010-2015 coalition. By 2014 they were costing £30 billion a year, in real terms nearly four times as much as Family Credit in 1999. They are limited but important help to people at one of the times of their life that they are most likely to experience poverty. The problem is not the existence of tax credits, but that they are inadequate.
The total amount spent on working-age poverty through the tax credit system is barely a quarter of the amount that the state spends on old-age pensions. Tax credits do nothing about low pay, although the payment of benefits to people with dependent children would be the only way of overcoming the inequality between workers with children and those without even if pay rates were increased. George Osborne plans to reduce the cost of tax credits by one-fifth, a total of £6 billion. The level of most benefits will continue to be frozen until 2020, a likely 20 per cent in real-terms from 2010 levels. The family element of the CTC (worth £545 a year) will be abolished for new claims. The CTC payment for children will be limited to the first two children for new claims. Typically, this will be a cut of £1,400 for each child. The threshold at which the payments start to be cut is to be cut from £6,420 to £3,850 (a cut of income of nearly £1,200 for anyone earning above the old threshold) and the benefit will be withdrawn more quickly. Many receiving CTC stand to lose nearly £1,400 per year immediately. Families who make new claims (including additional children) will lose much more (£3,000 for a family with three children). The cuts will push 300,000 children into child poverty. If the Tories get away with this, it is likely that they will come back for more, probably at the time that tax credits are fully incorporated into Universal Benefit in 2019.