Cutting Child Tax Credit mainly hurts working families

24 Jun 2015, by Richard Exell in Society & Welfare

David Cameron’s speech yesterday ends a lot of speculation: the government seem determined to introduce substantial cuts in Child Tax Credit. The prospect of £12 billion of benefit and tax credit cuts is so horrific that many people refused to believe they were possible. Last month I explained why I thought the politics pointed to their going ahead and I’m sad to say that it looks as though I was right.

The strongest rumours have been that the government intends cutting the “child element” in CTC back to the real value it had in 2003/4. Earlier on this month the Resolution Foundation’s blog included a really useful post from David Finch looking at the implications of this policy. Among other things, he noted that:

This would mean cutting the child element by £845 – a 30 per cent cut.

Two thirds of the cut would be paid for by the poorest 30 per cent of households.

One per cent of the cut would be paid for by the richest 40 per cent of households.

A low-paid two child family will be £1,690 worse off if this plan goes ahead.

This cut presents a political difficulty for the Prime Minister. Up till now, benefit cuts have been popular and one reason for this has been the government’s ability to claim that these cuts are only taking money away from groups that aren’t popular, like young unemployed people. But this cut targets a group that, up till now, all politicians have claimed to support: hard working families. The Resolution Foundation research shows that over two thirds of the people hit by this cut will be in working families.

It’s very hard to describe these people as scroungers or malingerers. They’re doing exactly what politicians and the newspapers say they should be doing: getting jobs and sticking at them even though the pay is lousy. So the government are trying a different approach here: they aren’t cutting these families’ benefits because they’re bad people, they’re doing it because that will help them.

This has two elements. Firstly, there’s what the Prime Minister called the “welfare merry-go-round”. He called for a “lower tax, lower welfare society” which suggests that he may be linking this criticism to the government’s plans to raise the income tax personal allowance again. It’s worth noting that raising the personal allowance does nothing for workers earnings below £10,600 and who therefore don’t pay any income tax in any case. And it doesn’t do much for people who earn a little above that – and to make up for the Child Tax Credit a two-child family is likely to lose it would have to rise to more than £19,000.

Raising the income tax personal allowance is a spectacularly inefficient way to help low-paid workers. Last year the Institute for Fiscal Studies revealed that raising it in one go from its then level of £10,000 would cost £12.5 billion. Of this 69 per cent, more than two thirds, would go to families with above average incomes and another 16 per cent to non-working families (mainly pensioners). Just 15 per cent would help working families with below average incomes.

Even so, Mr Cameron may well have appealed to some people by criticising a system that taxes low-paid workers and then gives them tax credits. This is rather misleading. According to HMRC statistics, there are 1,289,600 families with children receiving tax credits who are not in work and therefore very unlikely to be paying income tax. Of the 2,718,900 working families with children, 1,079,100 earn less than £10,000 a year and therefore will not be paying income tax. The next band up are those earning between ten and twenty thousand pounds a year, some of whom will earn less than the £10,600 threshold, but we cannot estimate how many. But we can be sure that at least 59 per cent of the families who receive CTC are not on Mr Cameron’s “Merry Go Round”.

The Prime Minister is on rather stronger ground when he says that he wants more low-paid workers to escape poverty through high pay:

“What I want to see is this move towards an economy with higher pay, lower welfare and lower taxes rather than low pay, high taxes and high welfare.”

This fits with the Conservatives’ current theme that they are the “workers’ party” and, going by today’s Daily Mail story, they are adopting a line on firms that pay low wages that, in any other party, would be denounced as the politics of class hatred. Apparently, Iain Duncan Smith “turned his fire” on Tesco, Asda, Sainsbury and Morrison’s and other firms “who pay low wages on the understanding that they will be topped up by the taxpayer” and said “companies should pay higher salaries, which would mean less tax credits from us”.

Now it’s certainly true that in-work poverty is a huge problem. According to the government’s Households Below Average Income statistics, 58 per cent of working age people in relative poverty live in working families and that proportion rises to 63 per cent for children. But what is the government actually planning to do? Will they, for instance, stop sanctioning unemployed people’s JSA if they turn down low-paid jobs? Or support trade unions so we can win higher wages for our members?

Obviously not. Their theory seems to be that the tax credits are somehow responsible for low pay, instead of a response to the problem. That cutting them will force employers to increase the wages they pay. I think that drastically overstates the power most low-paid workers have relative to their employers and essentially it’s the same approach that the Benefit Cap takes to bringing down rents – and likely to be about as effective.

I don’t like paying benefits that go directly to landlords and more than I like paying tax credits to workers who deserve a decent wage that would take them out of poverty without any need for benefits. But the way to deal with these problems is to introduce policies that lower rents and strengthen workers’ hand in negotiating pay. Simply taking the benefits and tax credits away is just going to cause poverty and hardship. It’s interesting that – even from the people who support what the government is up to – we don’t hear any claims that the number of people in in-work poverty is actually going to go down as a result of cutting the Child Tax Credit or that the deprivation of children in working poor families will do anything but get worse.

The Prime Minister’s arguments are merely an attempt to justify cuts that are being introduced to pay for lower taxes for the better off. And the people who will lose – and lose substantially – are the very “hard working families” everyone claims to admire.

It’s important to oppose these proposals. As a first step, there’s an excellent petition at 38 Degrees, that urges George Osborne not to cut Child Tax Credit. Please sign it, and get your friends and family to sign it to.