Tax Credits

The assault on family dependency continues

Donald Hirsch, Director of the Centre for Research in Social Policy (CRSP) at Loughborough University, outlines his response to the 2015 Spending Review…

George Osborne’s scrapping of the tax credit cuts announced last summer is momentous in several ways. But it is by no means the end of his mission to reduce families’ dependence on the state.

First and foremost, the changes save millions of badly-off working families from some drastic reductions in their incomes next April, typically by well over £1,000 a year. The day these cuts were announced in the Summer Budget, I pointed out that even people benefiting from the new ‘National Living Wage’ would lose out by these large amounts; but I did not dream that this argument would cause the cuts to be scrapped. It was only when the evidence piled up – my analysis for Joseph Rowntree Foundation, alongside reports by the Institute for Fiscal Studies and Resolution Foundation – that it persuaded Conservative MPs, among others, that the backlash could be disastrous.

So a second important aspect of the reversal is that the evidence got through clearly to politicians, and made a difference – a rare enough event in social policy these days. The reasons it caused such wobbles are also revealing. Unlike many welfare cuts, the 2016 changes to the tax credit allowances and withdrawal rate (a) came in one fell swoop, (b) affected existing recipients, not just new ones, and (c) were entirely borne by those in work.  In other words, they would have instantly and drastically hit the pockets of people seen as ‘deserving’.

This provides a seminal lesson to George Osborne about how not to do welfare cuts. Most of the time, the Government do them differently.  Both in the past five years and in remaining plans for the next five, support for working and non-working families is being progressively chipped away. Some of this happens gradually through failing to uprate benefits, tax credits and disregards with inflation. Some is through measures only affecting new claimants – so eroding our system of social support over time, without directly reducing support for individuals. Other measures make selective reductions for people in particular situations – people with larger families, those with more expensive housing, social tenants deemed to be ‘underoccupying’ their homes and so subject to the ‘bedroom tax’. These changes all add up over time, without delivering one single blow to be parried by a House of Lords revolt.

People on low incomes remain in firing line

As things stand, this march to ever less generous support for people on low incomes continues apace. As the Chancellor has pointed out, the plan to replace tax credits with Universal Credit will mean that not cutting the former will make no difference to what is spent in a few years’ time (the summer Budget’s cuts to UC have not been modified.)  My post-Budget projections of living standards over the current decade remain unchanged, based on the Universal Credit regime in 2020. It found, for example, that a working lone parent, who in 2010 had almost what her family needed for a minimum household budget, would be nearly 30% short of meeting this budget by 2020. Cumulatively, this is not just a squeeze but a drastic assault on the living standards of such families.

A change in tactics, not strategy

A pessimistic view of the Autumn Statement changes, therefore, is that they change only tactics not strategy. In the long term, the Government remains on a mission to reduce means-tested support to families both in and out of work. As has been shown clearly in recent weeks, higher wage floors, while welcome, are nowhere near enough to compensate for these cuts.

Tax credit U-turn signals hope for the future?

A more optimistic view is that commentators, politicians and the public have woken up to the damage that this strategy can do to families struggling on low working incomes. Any future cuts to UC will be harder to dress up as cuts to ‘welfare’ for those who do not work, not least because UC merges the in and out of work benefit systems. And any future Chancellor will be nervous of the potential backlash from reducing support to working families. If so, echoes of the 2015 tax credit row will have positive effects for many years to come.


Donald Hirsch

Donald Hirsch leads the Minimum Income Standard research, which produces on-going studies of what people need for an acceptable standard of living. By combining this evidence with associated studies of life on a low income and evidence from large surveys, his team is well placed to show the impact of turbulent economic times and changing welfare policies on the ability of low-income families to live adequately.  This allows him to produce regular commentary on policies as they unfold, and to make calculations influencing the national debate: in particular, Donald calculates the Living Wage outside London and makes an annual assessment of the cost of a child.

LIKE the Loughborough University Facebook page | Follow Loughborough University on Twitter | Follow Loughborough University PR on TwitterSubscribe to the Loughborough University YouTube channel