Lots of constituents have contacted me about the Government's proposals to reform tax credits, which the House of Commons debated for the second time last night. I understand the concerns they express and hope this detailed blog will go at least some way towards reassuring them.
Let me start by explaining the rationale behind the policy.
As you are probably sick of hearing, our government is still spending significantly more each year than it raises in taxes. It cannot carry on doing so indefinitely, so it has to reduce its spending and/or increase taxes.
The welfare budget is the biggest single element of government spending. If, having already promised to protect the NHS and schools budgets and meet our international commitments in relation to defence and overseas aid spending, we also decided not to touch the welfare budget, it would mean huge cuts in the remaining areas of government spending like funding for the police, housing and local government services. Whilst we believe it is possible to make some savings in these areas, we don’t think it would be right for them to have to bear all the cuts. That’s why our manifesto said that we would find £12 billion of the £30 billion of savings required from the welfare budget with the rest coming from tackling tax evasion by companies and wealthy individuals and reductions in spending by other government departments.
The three largest elements of the welfare budget are the state pension, disability benefits and tax credits. We don’t believe it would be right to cut the state pension or disability benefits, which is why we have focused on tax credits.
Why do we think it is ok to reform tax credits? Well, first this is an area of spending that grew very rapidly under Labour, more than trebling in real terms between 1999 and 2010. Tax credits were introduced to help people in low paid work, but by the time Labour left office 90% of working families were eligible for them. This suggests that there is some scope to save money. Our plans would reduce spending on tax credits to 2007/8 levels with five in ten working families still eligible for them.
Second, tax credits effectively allow employers to pay their staff less than they need to make ends meet, safe in the knowledge that the taxpayer will top their salaries up. It’s not just Conservatives who are concerned about this. The former Labour Chancellor, Alistair Darling, has said that tax credits are “subsidising lower wages in a way that was never intended”. I want to live in a country where hard-working people get paid well enough (and taxed low enough) that the Government doesn’t have to spend a fortune helping them to make ends meet.
Third, this is a good time to introduce reforms. Our economy is growing strongly, creating thousands of new jobs every month. Many of those affected will be working part-time or have a partner who is not working and will be able to find additional work, particularly if the Government helps with the cost of childcare.
For all three of these reasons, I think there is a strong case for reforming tax credits if at the same time we take action to ensure people are paid a living wage, pay less tax on what they earn and get help with the costs of childcare. That is exactly what the Government is doing:
We are introducing a new National Living Wage of £7.20 an hour in April 2016. This is forecast to rise to over £9 an hour by 2020, at which point someone who is currently working full time on the National Minimum Wage will be £5,200 a year better off. The National Living Wage will directly benefit 2.7 million people who are currently paid less than £7.20 an hour and it is estimated that a further 3.25 million people will benefit as employers are forced to increase wages to maintain differentials.
We continue to increase the personal allowance (the amount of money you can earn before you start paying income tax). When Labour left office, it was less than £6,500. By 2020, it will be £12,500, means a typical taxpayer will be paying £1,205 less a year and millions of low paid people will no longer pay a penny of income tax.
We’re also introducing 30 hours of free childcare for working parents of three and four year-olds and tax-free childcare worth up to £2,000 a year.
When you take into account all of the welfare and tax changes announced in the Budget, most families will be significantly better off by the end of this Parliament (though not, I accept, initially) as the following examples show:
- a couple with two children where only one parent is in work on the National Minimum Wage will see their income increase by £2,480;
- a lone parent with one child working 35 hours on the National Minimum Wage will see their income increase by £1,550;
- a couple with two children where both parents are working 35 hours a week on the National Minimum Wage will see their income increase by £5,570; and
- a single person with no children working 35 hours on the National Minimum Wage will see their income increase by £2,110.
In summary, there is no denying that some of the decisions we have taken are tough, but we have to get this country back in the black and it is important to look at the package as a whole, not just the reforms to tax credits. The Government is right to try to move Britain from a low-wage, high-tax, high-welfare economy to a higher-wage, lower-tax, lower-welfare one and that's why I supported it last night.