David Cameron’s team of pitch rollers have already started pushing the heaviest of heavy rollers up and down the square to prepare the public for cuts to tax credits. With the prime minister unencumbered by Nick Clegg, No 10 is taking advantage of the latest Labour leadership diversion to use the budget not just to set a growth framework, but also to label Labour as the party of welfare not work.

Committed to finding £12bn of welfare cuts over two years, George Osborne has few options. Pensions, child benefit and the disabled are all protected in the welfare budget, leaving the chancellor to target the two growing welfare pots that remain – the £26bn spent on housing benefit and £30bn on tax credits.

These two budgets are being billed in Downing Street as part of a welfare merry-go-round. Too generous tax credits subsidise low pay employers. Too generous housing benefits subsidise greedy landlords

Iain Duncan Smith has already started to portray the era of tax credits as a well meaning aberration in the history of the welfare state, a device invented by Gordon Brown in 2003 that turned into a bribe to persuade in-work poor to vote Labour.

Last week, Duncan Smith said tax credits were boosted in the two years before the 2005 election by nearly £10bn, and in the two years before the 2010 election by nearly £6bn. The scale of the increase on spending on them is indeed striking, but there is little evidence that tax credits have become a way for corporations to shirk their responsibilities to pay their staff properly.

The aim, in Cameron’s words, should be a move from a “low-wage, high-tax, high-welfare society to a higher-wage, lower-tax, lower-welfare society”. Two former Cameron advisers, Steve Hilton and Rohan Silva, now joined by Boris Johnson, have taken this argument to its most extreme lengths. They argue the loss of tax credit income can be compensated by increasing the minimum wage to the level of the living wage. Tackling poverty becomes the responsibility of the employer by paying decent wages and not the state.

In the words of one welfare specialist, Gavin Kelly, the chief executive of the Resolution Foundation, this proposal is a form of saloon bar economics that does not survive one minute’s exposure to the reality of the modern labour market.

The living wage is already calculated on the basis that someone has their full take-up of tax credits. If the tax credits were withdrawn, and the worker was still to receive the value of the existing living wage, the London living wage for instance would have to rise from £9.15 to £11.65 an hour. Britain may need a pay rise, but not one that creates hyper-inflation, followed by mass unemployment.

Kelly reckons if child tax credit is cut by £5bn, representing just under half the required welfare cuts, a single parent with one child working 16 hours a week on the national minimum wage could experience a cut in annual income of £845. To prevent this income fall they would need to boost their earnings by nearly £1,500 due to effective high tax rates – equivalent to a 26% pay rise.

So Osborne will cut tax credits and try to soften the blow not by forcing up the minimum wage, but instead by promising the personal tax allowance will rise in line with minimum wage and reach £12,500 per year by 2020 for those working 30 hours a week.

It is very hard to see how these cuts fit snugly in a one-nation politics aimed at the working poor. The Institute for Fiscal Studies point out families in the bottom half of the overall income distribution have 90% of all tax credits and the cuts will hit the incomes of 45% of working families. The vast majority – 72% of the losers – will earn less than £20,000 a year.

Five years out from the next election, Osborne can afford to make tough choices now and can reasonably claim he has a mandate to do so from the party’s election manifesto. His only constraint are his own leadership ambitions, and the presence of his rival Johnson popping up with crowd pleasing alternatives. The real test will be if Osborne can convince he is advancing a coherent reform to welfare, and not just arbitrary cuts to the most vulnerable.

