Autumn Statement: ‘Pain delayed, not scrapped’ in temporary halt to tax credit cuts

While most of the cuts to tax credits will be scrapped, some elements will remain

Oliver Wright
Whitehall Editor
Wednesday 25 November 2015 23:38 GMT
The cuts mean the Chancellor is still able to claim he has saved £12bn
The cuts mean the Chancellor is still able to claim he has saved £12bn (PA)

Ministers will be forced to go to Parliament and explain why they are breaching their own cap on welfare spending next year, as a result of George Osborne’s decision to scrap cuts to tax credits.

Two years ago, Mr Osborne announced plans to introduce the permanent cap on welfare which he said was necessary to hold Governments to “account” for excessive spending on benefits.

Now, as a result of the temporary climbdown on tax credits, Mr Osborne will breach the cap for the next three years and be forced to get parliamentary approval for the overspend.

While Labour welcomed the tax credit U-turn, experts warned that the Chancellor’s move was simply a case of “pain delayed” as the cuts would still come into force with the introduction of universal credit from 2017.

Analysis by the Resolution Foundation think-tank suggested that by 2020 more than three million households would lose an average of £1,000 from the £3.5bn cut to universal credit. The losses could be significantly larger for some families, they added.

Video: Osborne on tax credits

For example, a low-earning couple with three children, where one parent works full-time and the other works part-time, could lose £3,060, while a single parent with one child, working part-time on the national living wage, is set to lose £2,800.

The cuts to universal credit mean that Mr Osborne is still able to claim that he has found £12bn of savings from the welfare budget – he is just doing it towards the end of the period rather than at the beginning.

However the Chancellor will hope that raises to the new national living wage due to come into effect before then will lessen the pain for working families at a time when he will be up against other senior Tories vying to succeed David Cameron.

“By 2020, millions of working families will lose an average of £1,000 as a result of cuts to universal credit, though losses could rise to £3,000 for some families. The majority will be worse off despite tax cuts and the rising national living wage,” said David Finch, senior economic analyst at the Resolution Foundation.

Frank Field, the chairman of Work and Pensions Committee, said he welcomed the climbdown but added: “Judging by the announcements, strivers with children who claim universal credit will be worse off by up to £2,629. A more thorough review of in-work benefits, which takes as its starting point the full protection of lower-paid workers with children, is required”.

David Kirkby, senior research fellow at the Conservative-leaning think tank Bright Blue, said the Chancellor deserved credit for “listening to the concerns raised in recent months about the proposed cuts and for responding to them”. But he said Mr Osborne should now look to make changes to universal credit in order better to support the lower paid.

While most of the cuts to tax credits – which are due to be largely phased out and replaced by universal credit by 2018 – will be scrapped, some elements will remain.

The Treasury confirmed that there will be a cut from £5,000 to £2,500 in the amount of additional income a tax-credit claimant can earn without losing benefits – known as the “income rise disregard”.

There will also be a new cap on housing benefits for new tenants in the social sector from 2018, which will affect around 145,000 tenancies by 2021. Rules allowing housing claimants to continue receiving payments when they are abroad will be limited to four weeks instead of 13. These will save £200m by 2020.

Case study: ‘tax credits will still be cut’

Credit: Neil Hall (Neil Hall)

Russell Kennedy, 47, is a healthcare worker in Chelmsford. He lives with his wife and two sons.

The statement was just typical smoke and mirrors from a Tory Chancellor – it isn’t what it seems. He hasn’t reversed cuts to tax credits because they will still be cut for families with two children.

My son, who has severe learning disabilities and is on disability benefits allowance, will still be losing £400 a month in tax credits when he turns 20 in March. I did fear the statement could have been worse and I was surprised he moved even that much on tax credits.

But Osborne’s only acting on the Office for Budget Responsibility’s predictions that tax will bring in increased revenue. He’s spending on the country’s credit card, it’s money we haven’t yet received and that’s something he’s criticised previous governments for.

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