Thursday, 22 October 2015

My thoughts on the reform of Tax Credits

The Chancellor outlined a package of reforms in the Summer Budget to help working people. This package included the new National Living Wage, a higher tax-free personal allowance and lower taxes for all. His Budget also included changes to the Working Tax Credit Scheme.

I remain firmly behind the principle of tax credit reform.  Tax credits were introduced by Gordon Brown and have ballooned to an unsustainable level since. Tax Credits currently cost the taxpayer £34bn per annum. This figure is difficult to take in but it is almost half of our total spending on Education, a third of our NHS budget and more than the country’s total Transport budget.

Whilst tax credits should provide an important safety net for families on low pay, the level at which they were granted extended beyond people on average earnings. It is reported that even MPs have at times qualified to claim tax credits! It is also clear that the way the system operated acted as a cap on aspiration and allowed businesses to keep wages low knowing that the taxpayer would make up the difference.

The Tax Credit system is not only unsustainable, it is out of date, doesn’t work and needs reforming. Despite increasing year on year under Labour the number of people described as ‘working poor’ also rose and more people were out of work in 2010 than when they came into office.

The package of measures introduced by the Chancellor need to be taken as a whole. They form an important step in us moving away from a high welfare, high tax, low wage economy to a higher wage, low tax, low welfare country. The introduction of the living wage, replacing the minimum wage, which will be £7.20 in April 2016 will give full time workers on the current minimum wage a rise of £1,000 per year. Added to the rise in the personal tax allowance to £11,000 and doubling the amount of free child care to 30 hours per week, the overall package provides significant measures to support many households who will face a reduction in their tax credits.

When everything is taken into account four out of five families will actually be better off as a result of these changes. Taken together with all the welfare savings and tax cuts, a typical family where someone is currently working full time on the minimum wage will be over £2,400 a year better off by the end of the parliament. I believe these changes are necessary and in time will be very positive.

However, I do share the concerns of many at the impact these changes will have on some households. Whilst we do need to exercise some caution in just accepting some of the headline figures being bandied about, it is clear that some people will lose significant amounts of money as a result of these measures. Much of this is down to timing. The cuts in Tax Credits will be brought in ahead of the further rises in the Living Wage and Tax Allowance.

In the last few weeks many constituents have contacted me about the reforms to tax credits.  Wages and salaries in Cornwall are below the national average and so any change to tax credits are likely to disproportionately impact working people in Cornwall.

I understand the impact and hardships that these changes may cause.  I want to assure people that I have been working behind the scenes to ask the Government to do something to ease the impact of these cuts. I have met with the Chancellor George Osborne and have written to the Prime Minister.

Some people have contacted me asking why I did not speak out in the debate this week. Although speaking in the chamber is one way of addressing these issues, actually it is the work behind the scenes that is often far more effective in getting something changed.

The motion this week was a Labour Party Motion that proposed to completely reverse the changes to Tax Credits. This is something I could not support.

I want to make clear that I support the principle of reducing Tax Credits but believe the severity of what is proposed needs to be addressed. I will continue to work towards a different solution, a solution that softens the blow that has come relatively swiftly.