Why tax credit reforms are a “jobs penalty” on the very people the Conservatives affect to want to help.4
October 18, 2015 by Paul Goldsmith
The row about the Conservatives’ reforms to tax credit isn’t about politics. It’s not even really about economics. It is about people. People like Debbie, a friend of mine. People like Debbie doing exactly what the Tory party has told them to do. Go out and get work. Go out and start businesses. Don’t settle for a life on benefits. Have some dignity. People like Debbie are getting punished. It is wrong.
As a quick primer, tax credits are a way of bumping up the income of the low paid, giving them an incentive to work even for low incomes. The idea is that you are still able to provide food, warmth and shelter for you and your family without totally relying on benefits to do so. When the supply of labour outweighs the demand for it, many firms pay the minimum wage almost as a maximum wage you can get when you join the workforce. The government is very, very slowly legislating on that, bringing the minimum wage up to £9 in 2020. But they are cutting tax credits NOW.
They are lowering the amount of pay at which you start losing tax credits AND they are raising the speed at which they are withdrawn. The argument for tax credit reform is that firstly, tax credits give firms the space to pay low wages as they know those wages will be subsidised by the state, and secondly, there are some perverse incentives which mean that it might be more worthwhile working fewer than 16 hours a week in one sense, as you keep some major tax credits, but then more worthwhile working more than 16 hours a week in another sense, as you get more help with your rent. Fine, deal with perverse incentives. But not this way, not at this speed, and not with these targets.
Take Debbie. She has two young daughters. She works as many hours as she can given primary school hours (childcare costs more per hour than her wage) and earns £7,000 a year. Tax credits mean that she can provide for her daughters and herself. The withdrawals suggested by the Tories mean that in December she will get a letter telling her that her income will be reduced by over £1,000 a year. For Debbie that is massive. Debbie works, even though she could probably earn more living entirely off benefits, because she wants to keep her work record going, gaining experience so that when her daughters are older she has a career that can provide for her. She also works so that her daughters can see her getting up and going off to work every day, which makes a difference.
Debbie is doing EXACTLY what the Conservatives have been asking her and many others to do. She is doing what David Cameron calls “the right thing”. So is Michelle Dorrell, the single mum who started her own nail salon so that HER kids could see her do “the right thing.” Dorrell has blown this issue wide open politically with her appearance on BBC Question Time, in which she tearfully told the Conservatve minister on the panel that she had voted Tories in May because they encouraged her to work, and promised not to cut tax credits, and are now doing so (click here for clip).
She is right. Throughout the election the Conservatives refused to say how they would reduce the £12 billion welfare bill. At the same time they said they were the party of jobs, of working people. This is a ‘jobs penalty’. It penalises work.
George Osborne says that once the living wage is raised to £9 (in 2020) these people will be better off. Fine, withdraw tax credits in 2020. Not now. Now they are worse off. They may as well not work. This is why some wags have named this policy the “prole tax”. The poll tax brought down Margaret Thatcher, but the problem with the poll tax is that it put everyone in the same bracket. This singles out the poor working class and takes money from them.
Osborne is being attacked from outside the party, but also from within. There are 71 Conservative MPs who possess majorities smaller than the number of people in their constituency who will lose out to this jobs penalty. Many people on low incomes vote Conservative as they believe they will have a greater incentive to work hard for the higher rewards available. These 71 MPs must put pressure on him to reconsider.
Never has a policy shown so much disregard for the very people the Conservatives purport to want to help. Conservatives say that they want to provide the opportunity for people to escape poverty. Well they have to start somewhere. Setting up a business like Michelle Dorrell or taking a low paid job like my friend Debbie is the starting place, and this policy penalises them. Enough.