The Lords have decided to slow down the rate at which Tax Credits are to be reduced. There has been some controversy about their ‘constitutional’ authority to do this, but three things have worked in their favour. The conventions say they should respect precedents, but the Conservative majority in the Lords took as similar line against the last Labour government when National Insurance thresholds were being reconsidered. They shouldn’t oppose manifesto commitments, but this measure stood in direct contradiction to Cameron’s undertakings at the last election. They shouldn’t oppose financial legislation, but the government tried to slip this through without primary legislation.
Tax Credits are not a good way of supporting people in work. The design is complex, they penalise people heavily for increasing their earnings and they’ve been bedevilled by adminsitrative problems. These are features they share with a range of other ‘tapered’ benefits, including Housing Benefit and the new Universal Credit. I’ve argued before that Labour would have done better to have increased Child Benefit and the minimum wage. Nevertheless, the way out of a problem is often not the same as the way into it, and once you’re out in the middle of the ocean, it doesn’t help much to understand that you’ve set out in the wrong kind of boat. As things stand, there’s now no way to cut Tax Credits right away without hurting people on very low incomes.
The easiest option for the government will be to introduce transitional protection until the minimum wage is increased. That might work, but it won’t work well. Any differentiation between new claimants and existing claimants will make things even more complex – and the government is already introducing a further system in the shape of Universal Credit. There’s no guarantee that this kind of transitional protection will extend to some of the other circumstances that Tax Credits are supposed to cover, such as child care costs and disability. And there are certain to be problems when HMRC tries to recover overpayments at the end of the financial year.
The best way to deal with a complex problem is not to attack everything at once: it’s to break things down into a series of smaller, more manageable problems. We’re going to need distinct decisions on several elements: thresholds, tapers, overpayments, child care, disability, and timing – and the government needs to take into account how these will interact with Child Benefit, Housing Benefit, tax and national insurance and school meals. Unfortunately they’re more likely to rush at things to get a decision by the Autumn statement, and that’s a certain recipe to get things wrong again.