George Osborne is a lucky man. In different circumstances, the headlines in the 10 days before his autumn statement on Wednesday would have been dominated by the mess the chancellor has made for himself over tax credits.



Instead, attention has been on events in Paris rather than London, allowing the chancellor to consider his options. None of them looks particularly attractive, although those already writing Osborne’s political obituary should be careful. Chancellors can always conjure up money from somewhere, and this chancellor has time on his side.



All that said, Osborne is in a weaker position than he was in July when he announced the £4.5bn cuts to tax credits. That decision always looked a bit curious given that the chancellor had spent the election campaign trumpeting how the Conservatives, rather than Labour, were now the party of working people. It was impossible to open a paper or turn on the news without seeing a picture of Osborne in a hi-vis jacket and a hard hat chatting away on construction sites and in distribution warehouses. These are the self-same people, those dubbed strivers by the chancellor, who will be hit by the removal of tax credits.

The decision was doubly curious because Osborne did not need to make the cuts. The reason he is making them is so the Treasury can run a surplus of £10bn by the end of the parliament. The rhetoric was all about mending the roof while the sun was shining: the real intention was to build up a warchest that could be raided for tax cuts and spending increases in advance of the 2020 election.



One option for the chancellor on Wednesday would be to say that following a change of heart, he has scrapped the changes to tax credits altogether. Judging by his appearance on the Andrew Marr show, Osborne is not going down this route for a number of reasons. Firstly, the £10bn surplus penciled in for 2019-20 is already likely to be revised down by the Office for Budget Responsibility as a result of borrowing being higher this year than was expected back in the summer. The chancellor will not want to see his warchest disappear altogether.

Secondly, Osborne clearly has not given up on the idea that cuts in tax credits can be offset by increases in wages. This was how he justified the £4.5bn cuts in July, and it was how he justified them again on Sunday.

Finally, while there is a perfectly sound economic case for scrapping the cuts to tax credits, the U-turn would be a political disaster for Osborne and a gift to his potential leadership rivals. The chancellor is more worried about Boris Johnson and Theresa May than he is about Jeremy Corbyn.



Another way out involves phasing in the tax credit cuts over a number of years or only making the changes applicable to new claimants. The former doesn’t solve the problem, merely pushes it down the road closer to the next general election, thus running counter to the Westminster wisdom that says unpopular decisions should be implemented as early as possible in the parliament.

The latter would avoid clobbering current claimants, but would be a strange move for a government that wants to get people off welfare. There would be no incentive to work harder in the hope of no longer having to rely on tax credits, because if a claimant needed to come back into the system at a later date, they would receive less generous support from the state.

Tax credits cost the exchequer about £30bn a year, a fraction of the overall £250bn welfare bill. So, wouldn’t it be possible for the chancellor to find the £4.5bn to protect the working poor from elsewhere in the welfare budget? Yes, if he is prepared to say that pensioners should share in the pain involved in deficit reduction. Yes, if he is willing to have another look at alternative sources of savings from the welfare bill that were rejected back in the summer. But Osborne has shown absolutely no desire to upset pensioners, a group that overwhelmingly supports the Conservatives, and there is no low-hanging fruit elsewhere in the welfare budget.

Housing benefit costs £25bn a year, and there has been some suggestion that the chancellor might make claimants pay 10% of their rents, saving £2.5bn a year and affecting 4.8m households. The IPPR thinktank notes: “While this might incentivise households to look for cheaper properties, for households living in the private rented sector, the average impact would be a loss of income of about £570 a year, and £460 per year for social housing tenants.” In other words, Osborne would be solving one problem at the expense of creating another.

The same applies to employment support allowance, the replacement for incapacity benefit, the bill for which is £13bn a year. According to the IPPR, the chancellor could save £1.4bn a year from the £13bn ESA budget by cutting the entitlements of some claimants to the lower rate paid to jobseekers. But this would cost some of the seriously disabled people in Britain £1,200 a year.

OK, so Osborne doesn’t want to borrow more, he doesn’t want to phase the tax credit changes in or make them applicable only to new claimants, and the rest of the welfare budget is off limits. What’s left? In theory, he could seek bigger savings from Whitehall departments, but this looks unlikely. Cuts in tax credits were designed to spare the courts, police, and education from even even deeper cuts than they were going to suffer anyway. It was striking that the announcements made on the Marr show – extra money for counter-terrorism and planes for the MoD – involved spending more, not less.



Raising tax looks easier than deeper spending cuts. Higher fuel duty – particularly on diesel following the VW scandal – is one source of revenue; a sugar tax is another. If all else fails, there is always that old chestnut: a crackdown on tax avoidance.

One thing is certain: Osborne will do his utmost to dress up defeat as victory. A way of doing this would be to offer some transitional relief for those on tax credits, while taking steps to boost their take-home pay. The national living wage and a higher income tax personal allowance are possibilities, but if Osborne really wants to help the working poor, he should be thinking about raising the starting point for paying national insurance contributions (currently £8,000 a year) to the same level at which people start paying income tax (£10,600 a year). He would need deep pockets to fund this change, since it would cost about £6.5bn a year. Then again, he has dug himself quite a deep hole.

