Esther Shaw: From a fanfare to fiscal failure in three years

The child tax credits debacle shows that the Government hasn't learnt from its mistakes

I may not have children yet (I'm still not entirely capable of looking after myself, let alone taking responsibility for anyone else), but I know that if I did, then I would be angry.

It is three years ago this month since the Government launched its child tax credit scheme - amid a fanfare of hype and publicity - with the promise of delivering much-needed cash to parents.

But today, the flagship scheme, a central part of Gordon Brown's programme to help low-income families, has failed to deliver.

Admittedly, there are now around six million families in receipt of the credits, but an awful lot of them continue to suffer as a result of the chaos that has mired the scheme since its launch.

Now a new report says that HM Revenue & Customs (responsible for administering the scheme) overpaid an estimated £2.2bn to claimants in the 2004-05 tax year.

Even taken in isolation, this is a pretty hefty figure. But when you find out that this is the second consecutive year that overpayments have reached this level, it becomes simply inexcusable - particularly given that ministers had pledged to alleviate the problem.

We all make mistakes - although generally less costly ones than this. And when we do, we learn from them so that we don't make the same ones twice. One of the key issues with the child tax credit scheme is that an element of overpayment is an inevitable consequence of the way the system is designed. This is because families claim tax credits on the basis of their income from the previous year.

But in the words of Edward Leigh, chairman of the Public Accounts Committee, "What came out of the blue for the Government was that overpayment would routinely occur on such a gigantic scale."

While this smacks of maladministration and bad planning on the part of those running the scheme, it is not the perpetrators who suffer. Instead, it is vulnerable families. The taxman's attempts to claw back the money have had a devastating impact on low-income households, whose finances have been thrown into chaos by sudden and often unexpected demands for repayment.

In the bulk of cases, overpayments were the result of recipients failing to report changes in their circumstances. But some arose from errors by the Revenue.

Campaigners such as Citizens Advice have long called on the Government to write off overpayments made in error - and some concessions have now been made. These are part of a wider overhaul of the system by Mr Brown, announced in the pre-Budget report.

For example, claimants have to tell the taxman only if their annual income increases by more than £25,000 (compared with the previous £2,500).

But as Mr Leigh points out, it is too early as yet to tell if this - and other measures - will be successful. And the Government still has to address the problem of a computer system that continues to be plagued by problems - not to mention the ongoing risk of fraud.

I was there at the launch of the tax credits scheme back in March 2003 - a rather jolly event at 11 Downing Street, attended by a multitude of journalists and a very smiley Dawn Primarolo, the Paymaster General, singing the praises of her new "baby". The "face" of tax credits was the TV presenter and "celebrity young mum" Gaby Roslin, and the scheme was then branded "Money2Mummy" because the credits were to be paid directly to the main carer (usually the mother).

The scheme was backed by a £9m advertising campaign, and the claim to be "the biggest financial boost for mothers since the introduction of child benefit". But three years on, the picture is very different.

The saddest thing about all this is that tax credits, which were designed to lift low-income families out of poverty, have in many cases had quite the opposite effect. Some parents are even opting not to claim the money they are entitled to for fear of what might happen, preferring to stay clear of the scheme altogether

Mr Brown is struggling to restore the credibility of the scheme, but as experts such as Jane Moore from the Institute of Chartered Accountants in England and Wales warn, the short-term picture for tax credits still looks bleak.

Three years is a long time in anyone's book - and long enough, you would think, to make the changes required to achieve the balance between providing families with a stable income, and remaining responsive to changes in their circumstances.

All we can hope is that it doesn't take another three years to get it right.

Sam Dunn is away

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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