Budget responsibility: Tax credits are under threat from the Chancellor - as are the working poor unless he addresses their concerns

Like most things in the British taxation system, tax credits – potentially under lethal threat from George Osborne’s Budget next week – are there for a reason, and a reason that has been too readily forgotten.

When Gordon Brown introduced them as New Labour’s Chancellor 12 years ago, they were designed to correct some glaring economic and socially damaging anomalies in the tax and benefits system. These conspired to create income and poverty traps, so that people moving out of social security and into jobs sometimes had very little incentive to do so, because so much of their benefit entitlement was means-tested and their wages so meagre that they might have been better off turning down paid work.

These perverse incentives, everyone agreed, had damaged the national work ethic and had not, in the modern phrase, done much to “make work pay”. Combined with the then-new minimum wage and some welcome boosts to spending on schools (the Blairite mantra of “education, education education” springs to mind) these reforms did much to lift many of the working poor out of poverty and brighten their prospects. Then, as now, the best route out of poverty was a job – a “hand up rather than a handout”, as the slightly condescending soundbite of the time had it.

So there was a serious point to tax credits, and they gained acceptance and popularity as they went quietly about their work. Now, as a result of a rash Conservative election promise to lop some £12bn off the social security bill, they are threatened, and with them the incentives to work that can now be found at the bottom of the labour market. Indeed, there is an argument that these tax credits are needed more than ever, such is the general pressure on wage growth and, more controversially and less certainly, the compression of wage levels in some local labour markets as a result of immigration. The present Chancellor’s answer to these valid objections is a rise in the level of the minimum wage, and beyond the rate recommended by the independent Low Pay Commission. That, in fact, has some merit. There is no doubt that, on at least one reading, tax credits had themselves perversely subsidised employers to pay lower wages than the market might dictate.

Pushing the minimum wage up, and especially the living wage in costly London, might well address many of the disincentives that tax credits were designed to solve, but without that element of subsidy from taxpayers to companies and their shareholders. It would certainly do so at that lower end of the labour market. The abolition of income tax liability for anyone earning less than £10,000 – an abiding achievement of the Conservative-Lib Dem coalition – is also helping low-paid families deal with slow growth in their wages. The new universal credit, though scarred by its brushes with the Treasury and the usual computer foul-ups, may also yet prove a progressive form of social security, at least in its principles if not the actual amounts of cash dispensed.

The key in all this seems to be caution. The working poor are not an experiment in a social sciences laboratory. These are real people often blighted by poverty, poor health and dismal life chances, and any reforms to the way they make a living have to be very carefully and slowly implemented. There are always losers in these situations, and these families are ill-prepared to cope with unintended changes to their incomes, such are the slim margins they have to budget on.

Mr Osborne seems to want to present something of a “radical Budget”, the first wholly Conservative effort for 18 years. He should take care that his radicalism doesn’t create another, much less funny, episode of omnishambles this time round.