Tax credits: where now?

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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.