Why tax credits are the sign that George Osborne has deficit desperation

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November 11, 2015 by Paul Goldsmith


We commonly assume that when a person is rooting around in the bins for food, they have reached a low point. They need to have a look at themselves and  we need to help them. Now that George Osborne is left with no option but to raid incentives to work for the lowest paid among us to meet a political promise on the budget deficit, it is probably time he take a look at himself, and we need to help him too.
A key change has been the conversion of the right wing press from the chief supporters of austerity to observers who have been looking on with increasing horror at the path Osborne is going down. Perhaps the most significant critique was written last week by Fraser Nelson, Editor of the right-wing Spectator magazine and one of Osborne’s biggest cheerleaders. Nelson labels the cuts in tax credits as the ‘strivers tax’, because that is exactly what it is, and points out that both David Cameron and George Osborne attacked any policy that hit the working poor when they were in opposition (click here for Nelson’s article).

“Ah”, you might say, “but doesn’t every opposition leadership attack policies when campaigning that, once faced with the compromises of leadership, they have to then maintain?” To which the answer is yes they do. BUT this particular compromise is toxic. It is not necessary. George Osborne is making them for reasons that make no sense politically and economically. He has been reduced to rummaging around in the rubbish bin of working poor incomes because he has painted himself into a corner with promises that he and David Cameron made that they should never have made. At some point, a u-turn is needed. When that. U-turn comes, the Conservatives may as well make it a massive one (in for a penny, in for a pound one would say), and u-turn on a variety of mistakes made in the run up to the 2015 election.

They produced a manifesto that was aimed at coalition. It contained red meat for their core voters to get as many seats in a coalition, knowing that they could negotiate away some of the more poisonous meat (right-to-buy housing association properties, inheritance tax cuts, welfare cuts) in the coalition negotiations. But they won.

Because they thought they would be in coalition, they allowed themselves to be bounced into ring-fencing spending on health, education, international aid and defence. They allowed themselves to be bounced into promising not to raise income tax, VAT and National Insurance. Again, they thought they could quietly negotiate these away in coalition negotiations. But they won.

Because they thought they would be in coalition, they promised to produce a budget surplus (tax revenue greater than government spending) by 2019 of £10bn. They thought they could negotiate this away in the coalition negotiations, possibly to just balance the books by the next election. But they won.

So now the Conservative leadership need to make a choice. They can hit those they are most ideologically committed to helping, the people who get up on the morning to work for low pay instead of being a burden on the state. They can try to take from Iain Duncan-Smith’s universal credit budget, which after all manages to reduce the marginal tax rate of every extra pound these low paid workers earn to ‘only’ 55% (note, lower than higher rate of tax).

OR they can row back on those silly promises. They can unringfence some spending. They can row back on the planned budget surplus, perhaps cutting it by the £4.5bn these tax credit cuts were meant to save. Rumour has it Osborne will announce £1bn of mitigation in the Autumn Statement at the end of this month, but that leaves £3.5bn to take from the working poor.

Or, Osborne could halt his plan to add £3.5bn to the foreign aid budget over the course of this Parliament. The Tories, in a continuing desperate attempt to detoxify their brand, are committed to the Foreign Aid budget being the only budget that rises in line with economic growth. This leaves the Secretary of State for international development, Justine Greening, and her department, frantically scrabbling around for recipients of that aid every year.

Let’s be frank. Much as we like to support fashionable overseas causes, and much as we like to think that every pound we sent goes to stop someone starving, the truth is that foreign aid is mostly taking money from poor people in rich countries like the UK and giving it to rich people in poor countries.

When, in order to fulfill this obligation and still achieve a budget surplus, George Osborne is having to cut the income of a shift-working single mother by 10%, something has to give. It shouldn’t be the shift-working single mother.

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