Tax credits: a flawed friend

Following on from this week’s bleak news on jobs – with unemployment up and confirmation that those new jobs on offer are all part time and insecure – another wave of stealth cuts is about to crash over Britain’s working poor. After their tax credits were singled out for harsh treatment last spring then frozen in the autumn, a further £1bn will hit low- to middle-income families – many living on as little as £25k – in just six weeks’ time.

Perhaps we shouldn’t be surprised. Nick Clegg has made clear that his only priority is to increase personal tax allowances, believing as a matter of liberal philosophy that tax credits will always be inferior. Some leading Conservatives have made clear they see them as relics of a bygone era, held in the same affection as the nationalised industries of the 1970s – which helps explain why they have become a favourite cash quarry for them to mine. Meanwhile, growing numbers on the left view them as proof of government’s overindulgence of corporate Britain: just force employers to pay a proper wage and these wasteful subsidies could be washed away. All of which is a little odd, given that falling wages, soaring in-work poverty and rock-bottom consumer spending suggest that in-work tax credits should be coming into their own right now.

Whatever the zeitgeist, tax credits need to remain an essential fact of life in our economy for a long time to come. Struggling families would go under without them. It’s not just that focusing exclusively on the hourly wage will, on its own, always be a blunt way of securing reasonable family incomes, given it takes no account of the number of children in a household or chronic underemployment. It’s also the daunting scale of the low-pay problem – around a million people get paid the national minimum wage or below (£6.08 an hour), another five million get paid between this and the living wage (£8.30 in London, £7.20 elsewhere) – meaning there is an enormous distance to travel before higher wages on their own will secure reasonable household living standards.

By way of context, it’s salutary to note that for all the verve and validity of those campaigning for a living wage only about 10,000 people have benefited as a result of their efforts. And, contrary to what many think, even the living wage is nowhere near enough to ensure a typical household can live independently of state support: it has always been premised on full take-up of in-work tax credits, otherwise its level would shoot up to well above £10 an hour. Anyone who thinks we are going to raise the wage floor to this level any time soon needs to take a long walk. Nor are major hikes in the minimum wage about to come to our rescue. With the jobs market teetering and pay set to remain stagnant, the Low Pay Commission will be exceptionally cautious about taking any risk.

All of which makes it even more pressing that we recognise tax credits as essential at the same time as we remain open-minded about tackling their flaws. Just as we must question the sustainability of the underlying economic model that relied so heavily on tax credits to prop up family incomes even in the years of plenty, it’s also right that we interrogate emerging evidence that they may have a negative impact on wages and consider what this should mean for the minimum wage.

Nor should anyone dispute that the fiendishly complex tax credit system that evolved over the last decade is ripe for simplification. In this respect at least the coalition’s proposed universal credit is not a bad idea, even if its promise has been massively overhyped and its implementation risks radically under-estimated (it will improve things for those moving into work but make them worse for those seeking to progress at work – especially second earners, overwhelmingly women).

Tax credits were never only about boosting employment, they also exist to ensure that a large swath of our working families can actually survive in our low-pay economy. So as we push for higher wages, let’s not delude ourselves that tax credits aren’t needed as much as ever – or that another round of cuts to them is going to do anything other than punish those already at the sharp end.

This article first appeared in The Guardian