Some of the spending review’s big losers haven’t realised it yet

The media may be preoccupied with cuts to child and housing benefits – but all hell will break loose once tax credit cuts bite.

There is nothing quite like being in No 10 in the midst of a political storm: entering each day past a pool of journalists that swells in number as the dark clouds gather. The sense of siege is tangible, the momentum irresistible. Yet the media pack often miss the big story the first time around. At the time of the March 2007 budget, few anticipated the most portentous reform: the abolition of the 10p tax band. So, too, with October’s spending review. Present incumbents of No 10 be warned: a real storm is headed your way, but not from the direction you expect

So far, two big stories have emerged from the spending review. Cuts to child benefit for the affluent have caused outrage: their fairness was questioned, as has whether they can actually be enforced. Then caps on housing benefit became the story with politicians on both sides of the aisle competing to use more hyperbolic language to describe the impact on our communities.

Meanwhile another announcement – one that will reverberate for the rest of this parliament – has received very little scrutiny: sweeping if stealthy cuts to tax credits for working families on modest and middle incomes. In cash terms, more will be saved from these changes than from either of the two more prominent reforms that have dominated the front pages. Come 2012, when cuts to tax credits start to bite, they will significantly reduce the standards of living of a large swathe of the electorate. And then all hell will break loose.

Those who will be most affected by these changes – working families reliant on childcare and most families on middle incomes – have no idea they are coming, or how much their budgets are about to be squeezed. No-one has told them. They’ve heard that people out of work are going to see their benefits cut; and they suspect that some of the services that they themselves rely on will get cut. But they haven’t twigged that their family income is about to be reduced. As it stands, the first thing that many will see of these changes will be when look at their bank statements.

Yet the figures involved are eye-watering. By the end of the Parliament £2.35bn will be cut from the working tax creditpayments that go to two million families each year. That is an average of well over £1,000 per household. Parents who receive the full support for childcare – typically working mothers living in the south east – will lose as much as £1,500 a year from 2012, far more if they have two young children, creating a major disincentive to work. On top of this, over half a million families, all with incomes below £21k, will lose over £1,100 if the education maintenance allowance is abolished as the chancellor suggested in the spending review.

For all of these families, the pain of these losses will massively outweigh the gain from the coalition’s planned increase in personal tax allowances. And while the above inflation increases in child tax credit will at least ensure that levels of child poverty don’t rise, they will be of little comfort to most working families: for every extra pound being spent on tax credits, three will be cut.

For some perspective, let’s recall that during Labour’s 10p tax debacle the maximum amount that someone could lose was £232. The result? An all-out media assault and a war-like mentality within No 10. Though the political circumstances for the coalition are, in some respects, more benign – their backbenchers will certainly be less mutinous – the economic context is far bleaker. These new cuts to living standards will come at a time when earnings for many will have been stagnant for years, inflation will have been running high – and higher still for the types of families affected by these cuts. VAT will have gone up, as will mortgage rates. Working families will be angry and financially insecure. By then the strategy of blaming it all on Labour will have worn very thin.

For those working in No 10 there are few rules to guide daily decisions. But if there’s one you learn quickly, it’s this: make a large group of people worse off than they were the year before and you tend to get hit hard. The tax credit changes breach that rule and do so for exactly the wrong group of voters. Young working families on modest incomes tend to have weak party loyalty combined with an incredibly strong attachment to securing rising living standards. In 1997, they swung decisively behind Tony Blair. In 2001, as their living standards rose, they stuck with him. In 2005, as wage growth began to flatten, they looked elsewhere. By 2010, they left Labour in droves but they are yet to settle into a new political home.

Come the next election, few seats will be won or lost because of the recent changes to housing benefit or child benefit – whatever one may feel about the rights and wrongs of these changes, both could still prove popular with the majority of the electorate. It will be a living standards election determined by the broad mass of working families on modest and middle incomes who will vote on their personal economic circumstances and prospects. As 2012 draws closer, the black clouds gather.

This article originally appeared on The Guardian