George Osborne has 'no easy solutions' for softening blow of tax credit cuts, think tank says

Exclusive: The PM has defended the cuts, but growing demands from Tory MPs may force Mr Osborne to tweak his plan

The Chancellor may be forced to tweak his plans (PA)

George Osborne has “no easy solutions” as he considers how to soften the blow from his controversial cuts to tax credits, according to a new analysis.

The Resolution Foundation think tank found that some options being canvassed by MPs, as they put the Chancellor under mounting pressure to protect low earners, would cost much more than the £4.4bn savings from his proposals.

Although David Cameron has defended the cuts in the Commons, growing demands from Conservative MPs may force Mr Osborne to tweak his plans. Many MPs now expect him to stick to the cuts to the state-funded wage top-ups but to compensate the lowest paid losers in other ways.

However, the foundation, which champions those on low and middle incomes, warned that fast-tracking the Chancellor’s national living wage and planned rise in the personal tax allowance would still leave many people worse off.

For example, a single earner family on £15,000 a year is set to lose £1,500 in tax credits next April. If the living wage, which will replace the minimum wage for over 24-year-olds in April, were introduced at £9.35 an hour then rather than in 2020, the family’s loss would be reduced to £620 a year – “still a very painful drop”. If, in addition, the tax allowance, due to be raised to £12,500 by 2020, were increased to that level in April, the household’s loss would fall to £320 a year. But the cost of both measures would total £9bn, double the projected savings in the first place.

Working extra hours, which has been floated by some ministers, would not solve the problem. If this worker earned an extra £750 a year, he or she would take home only £150 because 80p of every extra £1 would be lost in reduced benefits and higher taxes.

Writing on The Independent’s website, Torsten Bell, the think tank’s director, said: “Many households will face a big hit to their family incomes. There are only three routes to making good that loss—higher earnings, lower taxes or higher benefits. There is not an easy way to compensate for the loss of £4.5bn of state support for working families. Raising the personal allowance, minimum wage or hours worked isn’t it. Nor is free childcare…or lower social sector rents.”

There is not an easy way to compensate for the loss of £4.5bn of state support for working families

&#13; <p>Torsten Bell, director of the Resolution Foundation</p>&#13;

Mr Bell argued that any proposal could at best achieve only two out of these three objectives -- saving money; reducing poverty and improving work incentives. If the compensation were not funded by extra government spending, it would have a negative impact on one of the other two.

Mr Cameron warned the House of Lords not to exceed its powers and breach parliamentary convention by blocking the tax credit cuts next Monday. The Liberal Democrats will table a rare “fatal motion” in an attempt to kill off the proposal. He came under pressure from Jacob Rees-Mogg, a Conservative MP, to flood the second chamber with more Tory peers if the House rejects the cuts.

Labour condemned the Prime Minister after he said he was “delighted” the move had been passed by the Commons.