Tax credit reform: Government must implement changes to lessen impact on the hardest hit

28 October 2015

After the Government’s tax credit reforms suffered defeat in the House of Lords this week, the Chancellor is expected to soon outline his plans to meet the requirement to “mitigate for at least the next three years their [tax credit reforms] effect on the poorest families” when he makes his autumn statement in late November.

The Chancellor’s plans, which have since been put on hold, were expected to cut £4.4billion from Britain’s welfare budget by restricting working tax credits. However, opponents have labelled the cuts as detrimental, with the Institute for Fiscal Studies (IFS) estimating that 3 million families will lose an average of £1,000 a year.

The Government has insisted that families would not face a loss in income, as a result of a raft of other reforms including the ‘National Living Wage’, the raising of the minimum tax threshold and the extension of free childcare provision. Despite this, the Chancellor has continued to face criticism from both sides, with many predicting that such policies would come too slow to buffer the loss of tax credits, particularly the four year gap between the reduction of tax credits, in April 2016 and the full implementation of the National Living Wage, in April 2020. Whilst others have insisted that even with these additional reforms many will still lose out; the think-tank Policy in Practise recently calculated that up to 66 per cent of current claimants will be at a loss due to the cuts.

George Osborne has since told MPs:

“We will continue to reform tax credits and save the money needed so that Britain lives within its means while at the same time lessening the impact on families during the transition”

However, there is speculation as to how he will balance his commitment to deliver a £10billion surplus by 2019-20, whilst also softening the impacts of the tax credit reforms. There are suggestions that the target could be slightly reduced in order to allow fiscal space to soften the cuts.

Potential changes to reduce the impact include a staged introduction of the tax credit cuts over the next three years in order to reflect the phasing of the minimum wage increases, in addition to an increase of the level at which tax credits start to be withdrawn, to protect those on the lowest incomes. Alternatively, the Chancellor could keep the tax credit reforms fully intact, whilst choosing to compensate the hardest hit through a combination of tax allowance changes and national insurance concessions. However, the Prime Minister’s continued refusal, this afternoon, to answer whether people will be left worse off as a result of the adjusted reforms, has spread doubt amongst critics about the effectiveness of any changes to the policy to lessen the impact of the cuts.