The House of Lords has told the government to think again with regard to tax credits. This raises a host of questions.
The first, but not the most important issue, is whether or not House of Lords had the right to take this action. The government is, of course, adamant that they did not, but I do not agree. To put it another way, if I had been a member of the House of Lords then I would have voted for the two resolutions that were passed last night. If the government wishes to claim that something is fundamental to its programme then it should, so soon after an election, have included it in its manifesto whilst if it wishes to claim that something is a finance matter that it should include it in the Finance Bill, and not try to enable it using a statutory instrument. Given both facts I think that the House of Lords was entirely within its rights to vote as it did and that if there is a resulting constitutional crisis and it will be an artificial one that will bring further discredit on the government.
More important is the issue of tax credits themselves. Here the government's claims are unambiguously wrong. The TUC analysis of the impact by quintile is powerful:
These cuts are, in combination, designed to penalise those on the lowest incomes most. Because of what we also know about income distributions this does necessarily mean that women are also penalised the most, and that since women are disproportionately represented amongst single parents their children will also suffer significantly. Nothing the government has said changes this: there is no one who has done a serious review of these measures who has concluded that they will ever benefit those on low income, and that is hardly surprising: if your aim is to cut £4.4 billion out of the benefits bill for those on low income and offer no compensating changes then, like night follows day, those on lowest income will be worse off.
All this does though is establish the facts that these reforms are penal and have the appearance of being intended to be so, and that the House of Lords objected to that fact, and were within their rights to do so. The important question to me, given my work is focused upon the tax system and the relief of poverty, is what to do about this. There are three ways to look at this.
The first, obvious, question to ask is what will George Osborne do now he has been challenged? Given Osborne's delight in game playing, which is one reason why he is in this mess, it has to be assumed that, first of all, he will hate losing and will have to work very hard not to respond spitefully. In the case of the House of Lords I think he will be unable to resist the temptation: a rash of new Conservative peers is likely in the New Year. In response I would suggest that Labour should be putting in an above average request for new working peers as a consequence, however distasteful Jeremy Corbyn might find the upper chamber. Parliamentary battles are going to be fought there over the next four years.
And what would a spiteful reaction with regard to tax credits be? Do not rule out the possibility that George Osborne will simply say he got this right, the Lords were wrong, and he will make little or no change. On balance I think that this is by far the most likely course of action that he will follow: for a man who was made tinkering into an artform inconsequential adjustments that he can persuade himself look like concessions are, I think, the most we can expect.
That, though, leaves the question of what should we ask for? This goes to the core of the questions to why these changes are supposedly needed. To put this in context, it must be remembered that these cuts are a matter of choice. George Osborne has boxed himself into an almost impossible position. He has said he will remove the deficit by 2020 and he has legislated to demand that he does so. Let us ignore the well-being of everyone else in the economy at the moment, George Osborne's well-being is now entirely dependent upon achieving this goal. If he does not come close to it then Boris Johnson is the next leader of the Conservative Party, and that is what this is really about. Osborne has staked his political future on the idea that governments should impose savings on an economy, whether in the form of austerity in the short term, or by running a budget surplus in the long-term, and the simple fact is that he is wrong to do so.
There are several reasons why this is true. There is, for example, an enormous and long-term demand for high-quality government debt in the savings market that can only be met by the government either running deficits resulting in the issue of gilts or by investing, resulting in the issue of bonds by a National Investment Bank. As I've long argued, there is nothing in the world economy that suggest that this is going to change for the time being: we are, if anything, heading for another downturn, and the need for a safe haven for the world's capital is growing, which only governments can meet. Running deficits is, then, an imperative at present both for those who are in need of the immediate benefits they provide, such as the recipients of tax credits who are the concern today, and those who wish to protect their wealth and who want to buy government debt. The coincidence of goals right across the spectrum of interests is extraordinary, but George Osborne is ignoring this.
The first, and most important, imperative of any alternative course of action which should now be promoted is then to say that austerity is wholly unnecessary: when people are in need it is the governments job to step in and ensure that they do not suffer and that is precisely what tax credits were designed to do.
The second, and vital, thing to argue now is that austerity can never deliver a balanced budget. I have explained why, to a very large degree, budget deficits are beyond any government's control here, but the simple arguments have also to also be made. The reality is that whilst any household and any company can, at least in theory, successfully balance its budget by cutting expenditure because there is no correlation between its expenditure and its income this is simply not true at a national level. In the macroeconomy any cut in government spending is simultaneously a cut in somebody else's income: as a matter of fact this has to be true. So what that means is that cuts are self-defeating. Cuts can't work because they cut income as fast as they cut spending and the net result is the government achieves nothing by doing them in a stagnant economy, which is what we are in.
To put this another way, using a company as an analogy, if it wants to cut its expenditure it may sack a member of staff and they are no longer its responsibility. In contrast, if the government cuts its expenditure by sacking a member of staff and that person has no other work to go to, or the other work that they can secure is much less well-paid, then that person remains the government's responsibility because benefits will have to be provided unless we are happy that in such circumstances the person should simply suffer. The House of Lords have made it clear that this option is not on the table. And nor is it worth suggesting that such cuts create room for the private sector to provide new jobs: all the evidence is that whilst the number of people in work is growing the vast majority of the new work is paid at very low rates with profoundly insecure terms and conditions attached. There is no solution in this direction present, and nor is there any sign that there will be so. The consequences obvious: a sustained attack on the implausibility and undesirability of austerity as a policy is now necessary.
Third, a sustained attack on the government's attitude towards benefits is also required. I watched Conservative MP Mark Garnier on Channel 4 News last night saying that the time has come to end the situation where a person is taxed on the one hand and given the income back as benefits on the other. I have to presume that he was serious, but this argument is fatuous.
It is of course not true that those who are in receipt of in-work tax credits are paying tax on one hand and getting the same some back as benefits on the other: they are overall net recipients of payments from the government.
It is simply not possible for in a modern, complex society to have a tax system that can ensure that those on low pay pay so little tax that they do not require benefit payments, which is the implication of his comments. This implies that the distribution of pre-tax income is fair and the only issue of concern is failure in the tax system, but that is simply not true. The problem for those in the lower ranges of the income spectrum in the UK is that what they are paid is insufficient for them to live on. This is why benefits have to be paid and the only tax systems that can overcome this problem are either one with negative tax rates (call them working tax credits, if you wish) or ones that pay a universal income to everyone irrespective of their total income and increases tax rates right across the spectrum as a consequence. Howard Reed and I modelled the second such system a whole ago: it could work, but is unlikely to be politically acceptable at present despite the fact that it overcomes the enormous problem that tax credits inevitably creates of very high marginal tax rates as benefits are withdrawn and taxes are paid.
In that case if we are to have a tax system that does really ensure that those who are on the lowest incomes in the UK can afford a decent standard of living in our society then the only options available to us are to either have a strong, effective, and gradually withdrawn system of working tax credits, or a policy of increasing overall incomes for those paid least in our society with compensation being provided to employers who could not otherwise deliver essential services, such as some forms of care for the elderly ( which simply shifts those to whom tax credits are effectively paid), or we tackle some of the inherent problems which create such a high cost of living for so many in this country, which must embrace the cost of housing. All are possible, and maybe all three might be needed, but right now tax credits are essential and any change is an act that can only be designed to increase inequality, human suffering and financial despair in the UK.
And that is what we need to say.
And that is why we must thank the Lords for what they did last night.
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Great that Tory MP Mark Garnier has decided that the time has come to abolish VAT – as that is the implication of what he was saying (i.e. that people shouldn’t be taxed and receive benefits at the same time!)
🙂
Your arguments make sense, as always, Richard.
I only want to comment on the remarks you make about Mark Garnier – a member of the Treasury Committee, I think – he is either lacking in understanding or deliberate in his misleading statements. He is not the only government representative I have heard make the same assertion. It’s sad that these people are not challenged by those interviewing them.
EU prevents elected left wing government taking charge of Portugal = “How much longer can Europe pretend to be democratic”
House of Lords prevents elected right wing government passing law = “We must thank the Lords for what they did last night”
Looks like your views are a bit partisan to the neutral observer?
The Lords acted within their very clear rights
Did that happen in Portugal?
The Portuguese President acted within his rights if that is the road you want to go down.
He acted within precedent
But the circumstances were unprecedented
Neutral, Jim?
I’m right leaning. I am equally uncomfortable with the behaviour or the Portuguese President and behaviour of the HOL. Against who they act whether left or right is irrelevant to me – democracy is more important than how I feel about an individual outcome.
I think most neutral observers would expect someone to have the same view on both of these incidents if they are being even handed.
You are selectively choosing evidence without context
Very right wing
I agree with Jim that ‘democracy is more important than the House of Lords’ but that would only be a valid argument if we actually had a democratic system in this country. We don’t, because (a) the Tories were able to secure a majority govt on only 37 percent of the vote (and there have been majority govts with even lower vote shares than that, e.g. Labour in 2005) – this is the dictatorship of a minority of voters. And (b) millions of people are not registered to vote and are disenfranchised (a problem which the move to individual electoral registration next month will exacerbate). So given that this is not a democratically elected government, any non-violent means of blocking its legislation – including action by the unelected House of Lords – is morally justified.
I was trying to explain to some friends last night how the HoL were within their right to table such motions, given the Gov introduced it as a statuary instrument that was not in their manifesto. Amazing how few of the mainstream media outlets are highlighting this, instead reporting the Government line that this was unconstitutional!
The government chose to make this constitutional: it was always within their right to prevent the Lords saying a word on the issue and they chose not to do so
Also, apart from their having chosen the SI route, rather than primary legislation, and the fact that there was no mention of this in their Manifesto, David Cameron EXPLICITLY DENIED that the Tories were going to cut Tax Credits, and gave an explicit assurance that this would be the case more than a couple of days before polling.
Accordingly, the Lords can honestly say that they are only restoring the situation to what it was before policing, and that it is the TORIES who are action unconsitutionally, in seeking to enact what they have not only NO mandate, but from which they are constitutionallly prevented from enacting.
With every utterance Osborne reminds me more and more of the Enormous Crocodile and his determination to devise ever more cunning tricks. I just hope that Osborne too gets his come-uppance!
There seems to be some degree of confusion over exactly what it was the Lords actually did last night.
To set some context it would seem reasonable to conclude that the argument being put forward is that cutting tax credits for the poorest is not a good idea on a number of levels and for a number of extremly valid reasons from the ethical and moral through to basic economic common sense and primary level arithmatic.
What the Lords did NOT do last night is stop these tax credit cuts. There was an opportunity to do so and kill them stone dead in the first vote on a Lib Dem motion but this was defeated by 310 votes to 99 because Her Majesty’s Official Opposition went AWOL by abstaining. Effectively ensuring that these tax credit CUTS WILL occur.
The vote which the Lords took last night, moved by Labour’s (sic) Baroness Hollis of Heigham, sought to commit the Government to introducing a three year transitional protection period for those affected.
So what’s the difference one might ask. Well, like everything else in life the devil is in the detail.
When asked how much this would cost Baroness Hollis replied that:
“The savings would come automatically by the rise in the living wage of which three quarters of a billion each and every year accrues back to the Government.
Secondly by the fact that new claimants to tax credits are not covered by our amendment. And third because the National Audit Office says that by 2019 over 90% of those on tax credits will be on universal credit where they will have their cuts.
So over the term of the Parliament the government will have matching savings which will probably exceed the very cuts the Government demands.”
Rather than the cuts in tax credits for the low paid being prevented by last night’s Lords non debate what has actually been achieved is:
1. Those becoming eligible for tax credits from now on, ie those not already on tax credits, will be hit by the cuts immediately with no three year protection.
2. Those already on tax credits will still receive cuts, except these will be paid for by cuts in universal credit as opposed to tax credits.
3. The sum total of the cuts are projected to be HIGHER than those proposed by the Government.
And this is as a result of the what purports to be an opposition party. First they ensure that the opportunity to vote these cuts down is defeated in the Lords by sitting on their cowardly, hypocritical, weasel little hands by abstaining and then, being the good little poodle of the British Establishment that they are, they provide cover for the Government through an amendment that will produce greater cuts than the Government itself are proposing.
What is confusing me is precisely how is it that George Osbourne should be upset in any way by this (rather than pretending to be upset for the media,because this is nothing more than a charade); and exactly what is it we are supposed to be thankful to the Lords for from last night’s smoke and mirrors?
I’ve seen more effective opposition from a dead parrot.
Our opposition sits in the House of Commons where they did vote against the cuts. It is not for the House of Lords to vote against motions passed in the Commons on simply partisan grounds as you seem to be hoping for.
Actually, that is the role of the Lords
That’s why they exist
Richard – the Lords does NOT exist for the members to follow partisan objectives.
That is obviously wrong: it is aligned on a party basis
If you are going to comment here get basics right or be deleted
Oh please. Are you honestly implying that Labour nominated Lords should always oppose motions put forward by a Tory Commons majority and vice versa?
They are NOT there to follow a partisan objective. They are there to scrutinise law objectively and if necessary reject poorly worded or dangerous law.
All of parliament shares that objective
Most law is not opposed
You really are not making a point
Given that the Labour Party’s peers deliberately abstained on a Lib Dem amendment to reject a piece of secondary legislation (which incidenty, the Lords have been doing as a matter of course without anyone questioning their costitutional or any other right to do so) rather than primary legislation, say in the form of a finance bill, in order of pass their own amendment which in all practical terms effectively covers the Governments arse for it; the only logical conclusion to be drawn from Jim ‘ s comment is that his definition of partisan is 180 degrees away from that of everyone else.
Osborne has been so skillfully outmanoeuvred and the credit, whether due or not, will be given to John Mc. I would imagine that Osborne was expecting to announce measures to compensate those worse affected in his Autumn Statement. Now he’s being forced to make them by the opposition. It’s all quite delightful. Gideon’s ‘Best Day Ever’ was also a while ago;o)
I’m delighted that the effects have been ‘delayed’ for the reasons you state Richard. However, I’m still more than a little disappointed that the Labour peers didn’t approve the Lib Dem ammendment to kill it completely.
I’ve not seen anything stating clearly whether this delay will do anything for new claimants in the coming months – as far as I can tell, it just protects those already in receipt of the credits.
I think that may have been a step to far
I ask myself what would I have done if in the Lords? And the answer is I would not have voted for the ‘fatal motion’
Sorry Richard. I think that the Labour lords had a duty to kill this. The tories, before the election, were absolutely adamant they would NOT introduce cuts to working tax credits. They have absolutely no mandate for it and they lied through their back teeth to the electorate.
They should have killed it stone dead.
Steve,
I too am having some problems with logic here. If there is an argument presented that cuts to these credits are undesirable, for reasons such as, say, they impoverish several million working families ( who even a Labour MP was indicating last night on Channel 4 news in an interview by Jon Snow would make many of those affected choose unemployment), are part of an austerity package which is economically illiterate and bad for the economy etc etc; then logically it seems reasonable to surmise that any opportunity to prevent this, even in theory, should be taken.
Not taking that opportunity undermines the position the argument is making.
On the basis of any argument that tax credit cuts, as part of the austerity agenda, are bad for the economy and unnecessary, the Labour amendment which went through the Lords last night is worse than that of the Government’s because the basis of that amendment, recognised by those making and supporting it, is that the amendment will achieve larger savings for the Government’s austerity programme at the expense of even greater pain for those affected.
If the official opposition, or anyone else for that matter, makes a particular argument it does not seem unreasonable to anticipate action consistent with that argument rather than either bottling out and going with something even more austere than what is being argued against.
Talk about malice in blunderland!
The logic was that outright opposition would have lead to a flood of new peers
Better to keep the Lords under control and force the issue back to the Commons for another go
There will be a flood of new peers anyway.
“Labour lords vote to prolong deficit”
Just one headline if the bill had been defeated completely.
Never forget: Labour is in favour of deficit eradication.
I sense more than a slight amount of politicking here..it may be that Dave and Gideon are facing some under-the-ribs-with-the-knife politics [at last].
With Boris-de-Bouffant breathing down both their necks. It really couldn’t have happened to two absolute a***holes in a better way.
All we need now is for the press to do their job, any sort of job rather than tory bum licking.
Given the basic arithmetical fact that any surplus achieved by the Government (which has been legislated into being) will result in deepening the far higher private deficit and debt time bomb which exists in the private sector (which includes all private citizens and families) and the fact that the Labour amendment will actually increase this surplus, the Labour Lords have certainly voted to prolong this deficit.
But perhaps not in the way you originally meant.
To me, presenting what is a social policy issue as an urgent budgetary necessity that cannot be argued with is the most malignant part of this escapade by Osbourne.
We’ve known for a long time that we are not in the same position as Greece so why the manufactured panic and gravity of this policy?
The Government has been plainly rumbled by the Lords. Goodness me! It almost makes one believe in democracy again.
For a few minutes at least.
Pilgrim – how on earth can an unelected chamber blocking an elected chamber make you “believe in democracy”. The mind boggles.
Context is everything
You ignore that
Jim
Well it’s case of what goes around comes around isn’t it mate?
The Tories have denied ever thinking about these cuts before the election and did not include them in their manifesto – so they effectively defrauded the ‘hard working’ electorate who voted for them.
Such underhand tactics deserve to be stopped by any method – even an unelected chamber.
For me its a question of the balance of justice – which I think in this case is right. And democracy should produce such balances.
I hope that has de-boggled your mind somewhat?
Richard – thank you.
Richard, very interesting piece. One point, and I accept that yours is an economic analysis, rather than a political one, but I think you underestimate the constitutional ramifications of the Lords vote.
You note in your response to Dave Hansell that the Lords should act as an opposition. As Vernon Bogdanor pointed out earlier, this is a shift from the Lords being a revising chamber to them being an oppositional one – inappropriate for an unelected chamber.
Don’t get me wrong, I think that the changes to tax credits are ill-thought out, but I am unconvinced that the Lords took the right course of action. There is growing opposition among the Conservatives, and a backbench debate on Thursday brought by Frank Field and David Davis which would give a voice to these concerns. My analysis would be that the Autumn statement would have included ameliorating measures without the Lords vote.
This was a revising motion
They asked that the Commons think again
They did not reject the motion
With respect, it was an attempt to cover a rejection as a revision – statutory instruments are not subject to revision, and the regulations will not now go back to the Commons for revision. The Lords rejected the measure, and the Government will have to introduce new measures.
The Lords is for revising legislation, not for revising Government policy. There are better ways to do that, such as showing that the Government has got the argument wrong, as your post does.
There was no choice but send back then
But this was a government choice anyway: they should have put it in a finance bill and this could not have happened
They did not so they invited comment, and got it
Question?
Why would some piece of legislation need “revising.”
Observation.
Possibly because A PART or THE WHOLE of that legislation is poorly drafted or counter to the best interest of the society which the legislation affects.
Conclusion.
It is not an either/or choice here. If the whole of a piece of legislation is a complete and dangerous nonsense than the whole of the legislation needs to be sent back. Just ad it would be if ad part of it fell into that category.
It’s called common sense.
I am afraid Dave that that is a huge simplification of a more complex issue. There are many reasons why various people will attempt to amend legislation, and in any event this is a statutory instrument, not primary legislation. This is an important distinction.
I am not quibbling with the immediate outcome of what the Lords have done per se, but I do have reservations about how they went about it. First, they confronted the Government on a money issue (whether it is or not is a bit of a grey area, but I believe that most would agree that this is), and second, the unelected chamber is opposing, rather than revising, a specific measure that has been passed by the elected chamber – there is a reason that very, very few SI’s have been rejected by the Lords (I think I am right in saying that before 1997 only one was defeated).
I suppose it comes down to whether you think the ends will justify the means, something that only time will tell. But in the short-term, concerned MPs have more time to come up with ways of mitigating the effects of the changes to tax credits, which is where I expect to see Richard publishing some proposals shortly (sorry to add to your workload)!
Statutary Instruments are Yes or No with no discussion (wonder why that was?) – it was inappropriate for Osborne to try to pass his ‘finanacial legislation’ by such a method. Most particularly as they must of necessity be passed – or not – by both houses without amendement. And additonally
http://www.theguardian.com/politics/2015/oct/23/lord-butler-peers-non-elected-boots-block-tax-credit-cuts#comment-62013668
Aah, the turtle’s head that is the withdrawal rate of benefits problem appears again. Too high and work doesn’t pay, too low and people on above average incomes are eligible. As a general rule if your country is an outlier on anything then tread carefully indeed, because the chances you’ve got it right and everyone else has messed up are slim. In the last three years a right-wing think tank and a US charity ( which is effectively another right-wing think tank as they believe in free market philanthropy over there ) have studied benefit withdrawal rates in advanced economies and the UK came out on top both times.
Making the essential stuff of a half-decent life cheaper is the way forward, in particular housing costs ( another outlier for the UK ).
The US: “free market philanthropy”?
Was the Think Tank the Brookings Institute and the charity “Avaaz” by any chance?
And what of the self employed? Encouraged by the system to be entrepreneurs and become self employed. They are employer and employee. How can they suddenly magic a ‘living’ wage and make more money to cover the loss of working tax credits and provide higher wages when people have less money to spend. It doesn’t compute. The self employed are being heavily penalised.
Perhaps if I only sold my product to rich people?
Have you read what this is about?
Please do – because it does compute, but not if you do not read what we’ve written
I have to concede that, given the realty that in a system using circulating money in which one persons expenditure is someone else’s wages, and vice versa, along with the arithmetical fact that Government/public sector surplus means increased private (corporate, household, individual) debt, I am having a problem wrapping my head around the notion that taking money out of people’s pockets through cuts in tax, child and now universal credit (which is what ‘the peoples party’ voted to allow in the Lords earlier this week) does compute.
For sure the big Corporations where all the wealth and value is ending up from the bottom can afford to pay the living wage. After all, they have the money. But with less money in circulation for the vast majority who are not large Corporations it is difficult to envisage a situation in each the majority of self employed small concerns will accrue sufficient money in a diminishing supply to plug the tax/universal credit cuts gap.
A large chunk of those who have ‘disappeared’ off the unemployment statistics have appeared elsewhere as ‘self employed.’ A typical example would be, let’s say an individual of my aqaintance, who completed a journalism masters just over two years ago. Eight months later he gets ago zero hours non contract for six months with a media group in the NW and registers as self employed. Thirteen months later he’s writing pro bono film reviews for a Web site set up by someone in a similar position. Neither of them have any money coming in and unless there is more money circulating which people can spend no prospect of earning a living, never mind a living wage.
Scale that up a few bars for those trying to employ a few people and the position is little different. Until the trickle up is reversed the only group likely to be able to fill the tax/universal credit gap with a living wage and make this compute are the large Corporates.
Agreed
Thank you Dave Halsall for putting it more eloquently than I
And Richard I did read the article but thanks for the belittling – spread the love
I did not belittle
If you had read it I do not understand the comments
Sorry predictive text
Dave Hansell