Why tax credit reforms are a “jobs penalty” on the very people the Conservatives affect to want to help. 

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October 18, 2015 by Paul Goldsmith

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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are lowering the amount of pay at which you start losing tax credits AND they are raising the speed at which they are withdrawn.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.

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4 thoughts on “Why tax credit reforms are a “jobs penalty” on the very people the Conservatives affect to want to help. 

  1. Tristan Pahl says:

    The speed is questionable and the fact that there are divisions within the party reflect this.
    But let’s remember that the Tory party did promise to reduce the 220 billion welfare bill by 12 billion and subsequently reduce the deficit. They only have five years in what could be possibly their only majority government for a while. This must involve quick decisions to fundamentally readdress the relationship between state and individual. More than half of of households take more from the government than they put in, which forces middle and upper bracket taxpayers to bear the brunt of increased spending. It is no secret that the Tories would want to reverse this.

    Tax credits were introduced under Blair to act as a safety net for low earners as opposed to a long agreement and way of life. In regards to low earners with children, it is hard for someone not feel sympathetic so much so that I question the speed at which this reform comes into place. It cane noted that the increases in minimum wage do offset the some of the losses in tax credits. There will be those who have a net loss , but many employers have already announced they will be paying their own, higher living wage in response to the government’s proposals.

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    • Some excellent points Tristan but I must pick you up on two things. The simplest is that yes the tax credit changes could be offset by minimum wage changes, but they are not really in place until 2020 whilst these changes are taking place now.

      The second is about your point about over 50% of the public taking more out of the state than they put in, and how this is a burden on the middle and upper earners. Could this be because those on lower incomes earn so much less and those on middle and upper incomes earn so much more? Could that not be a cause of the problem you identify, not a symptom?

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  2. Well you’ve hit the nail on the head with this phrase Paul – that the policy shows “disregard for the very people the Conservatives affect to want to help.”
    Just as their policy to sell off housing association property below market value will not help to ease the housing crisis.
    Just as their re-introduction of Grammar schools will not help to make this country into a meritocracy – or even approaching anywhere near the level playing field that they claim to want. (Because true social mobility means that some children of well-off, well-educated, successful people might not do as well as their parents – and that is the truth that dare not speak it’s name).

    As I said in response to your piece on Cameron’s conference speech – he ‘affects’ to care about the poverty trap, about growing inequality and shrinking social mobility – but the reality is that all of his policies work to the opposite ‘effect’. And surely that should be unsurprising given the fact that the Tory Party is funded by extremely rich people in the City and who own property, many of whom are Non-Doms – and their message is pumped out by similar people who own the print media.

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    • Tristan Pahl says:

      One Kent school being expanded is should be no cue for cries about social mobility. There is pressure from backbenches but on the whole the Tories know that reintroducing Grammar schools is far too controversial. They have decided despite in a majority that this policy is behind them.

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