2015 11 Editorial

Not So Comic Cuts

The Government’s claim to be on the side of hard working families received a setback on BBC’s Question Time on 15 October. Michelle Dorrell, a working class single mother of four children who voted Tory at the general election because she believed it would be best for her family, launched a near tearful attack on the proposed cuts to tax credits. Her attack was aimed at David Cameron who prior to the election promised that child tax credits would be protected. She said that she struggled at present to care for her children. Trembling with emotion, she stressed that the cuts would put them in an even worse position. Disgusted with Cameron’s broken promise, she is now, apparently, supporting Jeremy Corbyn.

Tax credits fall into two categories: Working Tax Credits and Child Tax Credits. From next April, the level at which Working Tax Credits start to be withdrawn will fall from £6,420 a year to £3,850. While the level at which Child Tax Credits are taken away will fall from £16,105 to £12,125. For every pound earned above these new figures tax credits will fall by 48p, with the marginal rate of tax on extra income exceeding 80%. Independent research by the Institute for Fiscal Studies shows that around 3.3 million households, 2.7 million with children, will, on average, be £1,300 a year worse off; even when taking into account the increase in the personal tax allowance, improved help with child care and the introduction of the so-called National Living Wage.

The IFS also estimates that the cuts in tax credits will increase the number of children living in poverty from 2.5 million to 2.8 million. And a report by the Resolution Foundation reveals that a further 200,000 households will be living in poverty by 2020. Furthermore, from 2017 Child Tax Credits will be limited to two children. To add insult to injury, the government has got rid of the official child poverty target and removed income poverty from its list of poverty measures. So much for David Cameron’s pledge at the Tory party conference to launch “an all-out assault on poverty.”

When Gordon Brown introduced tax credits in 2003 as a means of improving family income total expenditure in the first year, 2003/04, was in the region of £2.7 billion. As family incomes became depressed with increasing numbers of workers entering low paid employment and on zero hours contracts the tax credits bill soared. Today it is around £30 billion. Osborne is partly right to say is too high. However, the answer is not to take a hatchet to the welfare budget but to pay workers a living wage. Government and business should invest in capital and labour to increase productivity. So as wages rise, the tax credits bill falls.

Osborne claims he is doing this with the introduction of the National Living Wage–in reality an increase in the minimum wage– to the dizzy height of £9.35 per hour in 2019-20. (It was increased to £6.70 an hour on 1 October.) The facts, however, do not support his claim that the increase in the hourly rate, coupled with other changes, will result in working families being better off. A real improvement in family income would require an hourly rate of at least £12 in 2020. And the increase in personal allowance will help few low-income families, with three quarters of the increase going to those on above-average incomes.

The attack on welfare is a key part of the Government’s welfare into work strategy. The Job Seekers’ Allowance and other out-of-work benefits have already been cut with the aim of incentivising the unemployed to actively seek work, with most work available at the minimum or below minimum wage. But the cuts in tax credits are an attack on families in work and give a lie to the Tories claim to be the party of labour. Chancellor George Osborne rubs his hands with glee at the prospect of saving £4.5 billion from the welfare budget out of a target of £12 billion over the next five years. On past form this will pave the way for tax cuts, or a further increase in personal allowance, which will benefit high income earners disproportionately.

The Tories have labelled Labour the “Welfare Party.” Fearing that this would stick, Harriet Harman, acting Labour leader, recommended abstention on the second reading of the Welfare Reform and Work Bill on 20 July. Harman had clearly forgotten that it is the duty of the opposition to oppose. Her riposte to the charge of Labour as the Welfare Party ought to have been: “Labour is the Welfare State Party, not the Welfare Party.” John McDonnell was one of 48 Labour MPs who defied Harman and voted against the Bill, with McDonnell famously saying: “I make this clear: I would swim through vomit to vote against the Bill, and listening to some of the nauseating speeches tonight, I think we may have to.”

The UK is the fifth richest nation in the world, so the excuse that we cannot afford to properly fund the welfare state simply doesn’t hold water. Corbyn is right: the desire to roll back welfare support is a political decision. The welfare budget currently stands at around £220 billion, with almost one half, £95 billion, paying for pensions and pensioners benefits. Total spending on pensions and associated benefits has increased by 25% since 2009/10, due to increasing life expectancy. And as people continue to live longer expenditure will increase exponentially, particularly if the ‘triple-lock’ protection mechanism on pensions remains in place. The Institute for Fiscal Studies has said this should go. It costs £6 billion a year; more than enough to reverse the cuts in tax credits. But as most pensioners vote and a majority vote Tory we can expect little or no change. Much safer to bash the Working Poor, many of whom say ”they’re all the same”, no matter how many times they get bashed.

While pensions remain protected there have been attacks on other benefits. Household Benefit has been capped at £23,000 within London and £20,000 outside regardless of family size. Both are below the annual average working wage of around £27,000. Life is about to get worse for millions of families. In addition housing benefit will be removed from 18 to 21 year olds making it impossible for them to acquire accommodation. Private sector rents have risen rapidly, creating a spiralling housing benefits bill paid as a subsidy to landlords by taxpayers, just as working tax credits are a form of taxpayer subsidy to low wage paying employers. While this has happened, Osborne has handed a £1 billion inheritance tax cut to owners of houses valued between £650,000 and £1 million.

Osborne is carefully setting traps for Labour. His aim of a budget surplus by 2020 and thereafter, outlined in the Charter for Budget Responsibility is just the latest. Initially, McDonnell was willing to support this but then changed his mind for which he was ridiculed by the Tories and some of his Labour colleagues, twenty one of whom failed to back McDonnell and abstained from voting. Osborne’s plan has been described as economic nonsense by former Business Secretary Vince Cable. It has been ridiculed by a range of academic economists. But Osborne stubbornly refuses to change course.* A critical weakness of the Charter is that running a surplus prevents governments from borrowing to invest.

Meanwhile the right-wing press continue to attack Corbyn. He is accused of being unpatriotic on relatively trivial grounds, while more serious forms of unpatriotic behaviour are ignored. Osborne is selling the nation’s assets to foreign buyers, some of them state owned firms in France, Germany and elsewhere. It seems that Osborne welcomes nationalisation as long as it’s not British. So which is the more insidious? Not singing the national anthem, which has nothing to do with the nation, or standing idly by while thousands of British workers are thrown out of work by rapacious foreign capitalists and governments over whom we have even less democratic control than our own?

Now China and France will build nuclear power stations at Bradwell, Hinkley Point and Sizewell receiving a generous subsidy at a sky-high cost which the consumer will bear. EDF, and its minority partners (Areva and two Chinese state-owned companies), who will build Hinkley Point, are guaranteed a minimum price, indexed to inflation for 35 years, of £92.50/MWh for 35 years, compared to the current wholesale price of £40. Consumers and taxpayers are being ripped off and George Osborne considers it a good deal for Britain. Britain is open for business, he says. Yes, other countries’ business.

Britain was the first nation to build a nuclear power plant. Its skilled engineers were the envy of the world. It lost those skills when the industry was privatised. Most of the estimated 25,000 construction jobs from the new build, including 6,500 at Hinkley Point, will be filled by foreign labour. Britain needs to re-train its indigenous workers with genuine skills. It needs an industrial strategy that creates well-paid, high quality work. Of course, Labour must oppose the government’s attack on the welfare state. It must convince voters that it will not let welfare be abused. It must remind them that the reforming Labour government of 1945-50 was responsible for two decades of fast growth and low unemployment. But its chances of forming the next government must centre on persuading voters it has the remedy for a broken economy.


*Note: On 26 October the House of Lords voted for a delay to the cuts in tax credits while an independent study was carried out. Cameron accused ‘unelected’ Liberal and Labour Lords of abusing their constitutional position, claiming that the House of Commons had voted three times to support the cuts. But it is not only the Lords who oppose the current cuts package. Many Tory MPs are also unhappy, no doubt fearing a voter backlash in their constituencies. Osborne’s response to all this was to promise “transitional help” to those affected, while pressing ahead with the changes to the welfare system. The “transitional help” will probably be set out in the Chancellor’s Autumn statement at the end of November. We will return to this subject following the Autumn statement.