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Tax credits: over-inflated but still a life raft for many Tax credits: over-inflated, but still a life raft for many
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There is nothing easy about making work pay. Tax credits were a way to boost wages in an era when firms were either unable or unwilling to do the right thing. They were expanded in 2003 by a chancellor, Gordon Brown, who saw them as a necessary response to international pressure on workers’ earnings.There is nothing easy about making work pay. Tax credits were a way to boost wages in an era when firms were either unable or unwilling to do the right thing. They were expanded in 2003 by a chancellor, Gordon Brown, who saw them as a necessary response to international pressure on workers’ earnings.
It was a prescient move that shielded millions of people from the worst the global economy could throw at them. What Brown could not foresee was that the credits would become a major post-crash safety net, inflating their cost from £9bn to £30bn by 2010.It was a prescient move that shielded millions of people from the worst the global economy could throw at them. What Brown could not foresee was that the credits would become a major post-crash safety net, inflating their cost from £9bn to £30bn by 2010.
The coalition limited access to tax credits to cut the bill in the last parliament, and now the Tories want to go further. And while it might be ridiculous for David Cameron to say higher wages should prevent workers slipping back into poverty once their tax credits are withdrawn, there is a strong argument against pumping up the tax credit bill – currently standing at an annual £27bn – every year to maintain family living standards.The coalition limited access to tax credits to cut the bill in the last parliament, and now the Tories want to go further. And while it might be ridiculous for David Cameron to say higher wages should prevent workers slipping back into poverty once their tax credits are withdrawn, there is a strong argument against pumping up the tax credit bill – currently standing at an annual £27bn – every year to maintain family living standards.
Determined to cut an extra £12bn from the welfare bill, Cameron is leading from the front. Just the other day he said he planned to deal with the “complacency in how we approach the issue of low pay”. He added: “This is what I would call a merry-go-round. People working on the minimum wage, having that money taxed by the government and then the government giving them the money back — and more — in welfare.”Determined to cut an extra £12bn from the welfare bill, Cameron is leading from the front. Just the other day he said he planned to deal with the “complacency in how we approach the issue of low pay”. He added: “This is what I would call a merry-go-round. People working on the minimum wage, having that money taxed by the government and then the government giving them the money back — and more — in welfare.”
Even the left has an issue with a benefit that is clearly exploited by many employers as a wage subsidy, which does more to boost corporate profits than raise household living standards.Even the left has an issue with a benefit that is clearly exploited by many employers as a wage subsidy, which does more to boost corporate profits than raise household living standards.
Yet there are several holes in the prime minister’s thinking. For instance, the list of employers prepared to top up the minimum wage to match the living wage are still few. Those that have are either among a small band of businesses that wear their ethics on the sleeve, such as the retailer Lush, or have so few low-paid workers and are so profitable they can afford it, such as Nestle and KPMG.Yet there are several holes in the prime minister’s thinking. For instance, the list of employers prepared to top up the minimum wage to match the living wage are still few. Those that have are either among a small band of businesses that wear their ethics on the sleeve, such as the retailer Lush, or have so few low-paid workers and are so profitable they can afford it, such as Nestle and KPMG.
Cameron contends that he wants to create a high-wage economy full of professionally qualified workers. But he should know the pressure is in the opposite direction. At a conference to discuss Britain’s export performance, one of the Hinduja brothers, whose combined wealth, according to Forbes magazine, is in the top 100 in the world, asked Cameron to abolish the minimum wage as a way to expand growth.Cameron contends that he wants to create a high-wage economy full of professionally qualified workers. But he should know the pressure is in the opposite direction. At a conference to discuss Britain’s export performance, one of the Hinduja brothers, whose combined wealth, according to Forbes magazine, is in the top 100 in the world, asked Cameron to abolish the minimum wage as a way to expand growth.
A race to the bottom cannot be overcome by Cameron’s plan to raise the personal tax threshold to at least £12,500. It is cast by the Tories as a way to help the low-paid, but a major critique by the Resolution Foundation showed that the increase from £6,475 in 2010-11 to £10,500 in 2015-16 helped the better off more than those on lower incomes.A race to the bottom cannot be overcome by Cameron’s plan to raise the personal tax threshold to at least £12,500. It is cast by the Tories as a way to help the low-paid, but a major critique by the Resolution Foundation showed that the increase from £6,475 in 2010-11 to £10,500 in 2015-16 helped the better off more than those on lower incomes.
Tax credit spending, like the housing benefit bill, needs to be brought under control. That should not mean forcing benefit recipients to rely on their employers’ goodwill. With living wage employers so thin on the ground and tax changes favouring the rich, the doctrine of self-reliance pitches low-paid workers into an unfair fight.Tax credit spending, like the housing benefit bill, needs to be brought under control. That should not mean forcing benefit recipients to rely on their employers’ goodwill. With living wage employers so thin on the ground and tax changes favouring the rich, the doctrine of self-reliance pitches low-paid workers into an unfair fight.