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George Osborne 'should postpone plans for tax credit cuts'

Published 11/11/2015

MPs warned George Osborne that accelerating the increases in the personal allowance or national living wage
MPs warned George Osborne that accelerating the increases in the personal allowance or national living wage "will not wash" as solutions to the problem

George Osborne should postpone his plans for cuts to tax credits for a year and may be forced to accept he cannot find the budget savings he hoped for, a cross-party committee of MPs has said.

The Chancellor has been forced to come up with a package of mitigation measures following a humiliating defeat in the House of Lords, but MPs warned that there was little Mr Osborne could do unless he was prepared to change his proposals within the tax credit system.

The MPs said there was no "magic bullet" to protect low-paid workers from the planned £4.4 billion of tax credits cuts, and accused the Treasury of being "unacceptably evasive" for failing to provide information about the impact of its measures on different income groups.

The Commons Work and Pensions Committee said there was general agreement that the Chancellor should rethink cuts set out in July's budget that went "too far and too fast", costing the average affected family £1,100 - "a reduction in income that many cannot afford".

The MPs assessed the various options the Chancellor could use when he comes forward with measures to soften the blow in his Autumn Statement on November 25, but came to the conclusion that the "only efficient and effective immediate means of mitigating the tax credit cuts lie within the tax credits system".

The committee's report said the measures announced alongside the tax credits cut in July's budget - the new higher income tax personal allowance and national living wage - "should not be confused with compensation for tax credits cuts".

The report said the measures did not help many of those who would be hit by the tax credit measures, due to come into effect in April, and the benefits to those who are helped were "generally dwarfed by the cuts, especially in 2016-17".

The MPs warned Mr Osborne that accelerating the increases in the personal allowance or national living wage "will not wash" as solutions to the problem.

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The increase in the income tax personal allowance is a "very badly targeted tool", meaning an individual will only start to pay income tax when they earn more than £11,000, but will start to lose tax credits if their combined household earns as little as £3,850.

A single earner with two children working 35 hours will increase their net income by £323 pounds a year under the national living wage, but will lose £1,701 in tax credit cuts, leaving the family £1,378 worse off overall.

Only about one third of those affected by the tax credit cuts would benefit from the increase in the national living wage, even by the time of its full implementation in 2020/21.

The MPs also rejected alterations to national insurance contributions and told Mr Osborne he should "resist the temptation to raid universal credit" to find extra money.

The warning follows reports of a rift between Mr Osborne and Iain Duncan Smith because the Work and Pensions Secretary is resisting proposals to pay for reductions in envisaged cuts to tax credits by making the new universal credit less generous.

They said it was "inevitable" that the Chancellor would have to accept he would not be able to find the £4.4 billion of savings originally planned.

The MPs said: "There is no magic bullet within the tax credit system. One of three things has to give: the impact on poverty, work incentives or the cost. If one accepts both that the proposed cuts to some families are too great and that the limits of damage to incentives to work have been reached with deduction rates of up to 93%, then a reduction in fiscal savings is inevitable."

The MPs said the Government's aims to cut the welfare bill and balance the books would "not be compromised by the phasing in of the tax credit cuts".

They added: "Given the scale of the proposed changes, there is no simple way to mitigate them. We recommend that if, indeed, the effects cannot be satisfactorily mitigated, the Government pause any reforms to tax credits until 2017-18.

"This would allow a broader discussion of the options in their proper context."

The MPs said the Government was "reaching the limits of cuts that can be made to the working-age welfare system, and particularly on those who are strivers".

The committee's Labour chairman Frank Field suggested tax credits should be abolished in their current form and replaced with a new system.

Mr Field, a former welfare reform minister, said: "No-one has been able to provide the committee with a satisfactory series of mitigating policies to combat the impact of cuts in tax credits.

"My advice to the Chancellor would be to pause and use the next 18 months to bring forward a major overhaul to abolish tax credits as we know them.

"A new system could come in fully by 2020 when the Chancellor's national living wage will be paying a wage of £16,000 per year.

"This would allow him to question whether a reformed tax credit system shouldn't be remodelled to help only lower earning families with children."

A Treasury spokesman said: "The Chancellor has already made clear that the Government will listen about how we make a transition to the higher wage, lower tax and lower welfare economy he wants to see, and will announce proposals on how we do that at the Autumn Statement.

"So this report is out of date. Like other analyses, the examples cited here don't consider other measures the Government has introduced or is introducing to support working families, such as the free childcare that will be worth £5,000 a year per child, freezes in council tax and fuel duty throughout the last Parliament, higher public spending on the NHS and schools, or the upward pressure on wages up the income scale that we are already starting to see thanks to the new National Living Wage.

"The Government's end goal is clear: this country cannot have an unlimited welfare budget that squeezes out other areas of public expenditure."

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