A reconsideration of tax credit cuts Contents

4Wider context

Universal Credit

72.The proposed cuts to tax credits take place in the context of the ongoing rollout of Universal Credit (UC). This is expected to result in a more coherent welfare system with improved incentives to work.96 The Government expects rollout to be complete by
2020–21.97 Should this planned timetable be met, the argument about tax credits is a short-term one.98 However, there are considerable risks to the rollout schedule which should caution against relying on UC to come to the rescue.99

73.Even in UC, however, marginal deduction rates will reach 76% and, following the Summer Budget, more earnings will be subject to tapering.100 We heard concerns that the changes to UC were tantamount to accidentally making a “very, very large removal of the original purpose of that entire project”.101 Rt Hon Iain Duncan Smith MP, Secretary of State for Work and Pensions, countered that the highest marginal deduction rates in UC were still lower, and therefore provided greater incentives to work, than those in tax credits.102 Though work incentives in UC have been eroded, that is undeniably true.

74.It has been reported over recent days that the Chancellor is considering cuts to UC funding as an alternative fiscal saving to some of the tax credit cuts.103 Again following the iron law of welfare reform, he could only achieve this through either imposing cuts on low income groups or reducing work incentives. A further reduction in UC thresholds would be a regressive move that would disproportionately affect poorer claimants. The Daily Telegraph reported on 5 November 2015 that the Chancellor is considering increasing the net income taper in UC from 65% to 75% “and perhaps even higher”.104 A 75% taper would result in the marginal deduction rate faced by taxpayers claiming UC rising from 76.2% to 83.0%. Under such a system, only housing benefit claimants would face lower marginal deduction rates in UC than in the existing tax credit system. For other striving families, additional work would pay even less.

75.We are concerned by reports that the Chancellor is considering further cuts to Universal Credit as a means of covering adjustments to his tax credit plans. Any such change would either just shift the burden of cuts to different low income families or further undermine the objective of making work pay by removing a higher share of earned income. The Government’s flagship welfare reform will struggle to survive further dilution and still achieve its aims.

The wider welfare system

76.Various proposals for how the wider working age welfare system might be used to mitigate the cuts have been made. The CSJ suggested discretionary payments could be used to provide short-term support to affected families.105 We are currently conducting an inquiry into the local welfare safety net.106 It is, however, already clear to us that relatively small sums of the order currently devolved to local authorities would not be adequate to compensate for such large cuts to so many families.107

77.We asked our witnesses whether there were other credible means of reaching the Government’s objective of cutting £12 billion from working-age welfare expenditure by 2020-21. Paul Johnson was clear that there are no easy alternatives in, for example, housing benefit or disability living allowance. He suggested that more ambitious, but contentious, reforms might be considered:

You could abolish child benefit or roll it up within tax credits or universal credit. That would probably be the least distributionally regressive thing that you could do, but again there are lots of very good reasons why you might not want to do that.108

Beyond working age benefits

78.There are limitless possible fiscal savings beyond working age benefits. We did not seek to conduct our own Budget or Spending Review. However, the notable option of reviewing the tax treatment of pensions stood out. Paul Johnson told us:

The way we treat pension savings for national insurance contributions is staggeringly generous in the sense that no national insurance contributions are ever paid on employer contributions to pensions. You could charge that upfront or you could charge it on pensions in payments and you could start doing that relatively quickly”.109

79.Within the welfare system, it is clear that repeated savings are being sought from working age benefits while pensioner benefits remain protected. A combination of the generous “triple lock” system of state pension growth and the ageing population mean that pensioner benefits are projected to make up an ever greater proportion of both the welfare bill and total public expenditure.110

A debate on the future of welfare

80.A pause of a year in the implementation of any major reforms to tax credits would enable a necessary debate about the future of working age benefits, and their position in a sustainable welfare system. This would enable ambitious reforms, going beyond tweaks to a creaking system, to be considered.

81.This short inquiry has demonstrated that the Government is reaching the limits of cuts that can be made to the working-age welfare system, and particularly on those who are strivers. At the same time, spending on pensioner benefits will continue to rise sharply and, arguably, unsustainably. We will investigate the generational balance of welfare expenditure over the course of this Parliament.

96 DWP, Universal Credit: welfare that works, Cm 7957, November 2010

97 Oral evidence by Lord Freud on Benefit delivery, Qq 223-234, HC 372, 4 November 2015

98 National Audit Office, Universal Credit: progress update, HC 786, 26 November 2014

99 Oral evidence by Lord Freud on Benefit delivery, Qq 223-234, HC 372, 4 November 2015

102 Oral evidence by the Secretary of State on the Department for Work and Pensions Annual Report and Accounts, HC 507, 28 October 2015, Q5

103 For example, The Times, 4 November 2015, Hands off Universal Credit warns Duncan Smith, by Sam Coates

104 The Daily Telegraph, 4 November 2015, Why does George Osborne have it in for the workers?, by Fraser Nelson

105 Centre for Social Justice, Reforming Tax Credits, November 2015

106 Work and Pensions Committee, Local welfare safety net inquiry

107 Emergency local welfare assistance is now devolved to local authorities, replacing elements of DWP’s discretionary Social Fund. In 2015-16 the Government identified £130 million for local welfare provision in grants to upper-tier local authorities in England, however, such services were to be met from existing budgets. In response to a consultation, the Government allocated an additional £74 million to such schemes. However, this funding was again not ring-fenced and local authorities are free to spend more or less as they see fit. Written Statement (HCWS246) by the Parliamentary Under Secretary of State for Communities and Local Government, Kris Hopkins MP, 3 February 2015.

© Parliamentary copyright 2015

Prepared 9 November 2015