Wednesday 23 June 2010

How Theresa May's tax credits lie backfired ... and how David Cameron misled Mumsnet

As Left Foot Forward sets out, George Osborne's budget reforms mean that "By 2012-13, no family with one child over the age of one and income over £30,000 will get a penny in tax credits." Families with one child on £25,000 will also have their entitlement cut.

Yet Theresa May gave a categorical pledge that Conservative tax credit cuts would not affect any family with earnings under £40,0000, in an aggressive and angry article headlined Labour lies on tax credits which accused Labour of a "scaremongering lie" over Tory plans to cut tax credits beyond that.

In the last couple of days the Labour Party briefly paid for a misleading advert on the popular MumsNet site about our plans for tax credits. I think it’s important that people know the truth.

They say our policy will take away tax credits from families with incomes of £31,000 or more. That is a lie, and it is irresponsible for Labour to be scaremongering in this way and worrying families needlessly ...

“No families with a combined household income of £40,000 or less will be affected by our [tax credit] policy.”

That commitment could not have been clearer - yet the government appears unwilling to acknowledge that it has now been broken, with Osborne telling the Commons he was cutting tax credits for those on £40,000, and failing to acknowledge the losses to those on lower incomes.


David Cameron could also face charges of having misled Mumsnet users over tax credits, when he wrote:

Here's a straight, non-waffle answer. As a part time worker and a lone parent, you should not lose out. We recognise that tax credits help families, that's why we introduced the first one way back in the 1990s. We would stop the payment of tested tax credits to families of incomes of more than £50,000. We've got a massive debt crisis in this country, and so I think that those payments aren't really affordable any more. We would also reform the whole administration of tax credits to make the system simpler, fairer, and stop the painful problems we've got at the moment where people are getting the wrong payments and then the Government has to claw the money back.

Beyond Cameron's claim to be cutting for those on over £50,000, Osborne's reforms would seem to have done the opposite to what Cameron promised Mumsnet users. The much tighter rules on income change rules are likely to bring back the problem of over-payments very sharply, as Robin Williamson technical director for the Low Incomes Tax Reform Group, explains to This is Money,

'The amount by which claimants' income can increase without it affecting their award is to be reduced from £25,000 to £10,000 from April 2011, which should not make too much difference. But when it decreases to £5,000 from April 2013, we are concerned that, if not carefully managed, it may signal a return of the income-related overpayments that caused considerable distress in the early years of tax credits.


This is Money has more on the stealth cut to tax credits, glossed over in Osborne's spech.

Osborne didn't mention this in the announcement, instead focusing on the new £40,000 cap ...But detailed figures hidden away in Budget documents show that from 2012, those with joint incomes worth more than £23,275 will lose their tax credits.

Treasury sources have admitted that 5.7m families will not be able to claim a penny of the credit from 2012, leaving just 1.3m of the country's poorest households benefiting from the payment.

At present, child tax credit is made up of a family element worth up to £545 a year, and a child element of up to £2,300. On top of this, those who have a baby get an extra £545 credit in the first year.

Families with incomes above £16,190 get their child element whittled away at a rate of 39p for every £1 they earn. And those earning above £50,000 lose their family element until at £58,000 they get nothing. From next April, the rate at which the child element would be taken away would increased to 41p for every £1. And those earning above £40,000 would start to have their family element removed at a much quicker rate until they lose everything at £41,329.

In a move not announced by the Chancellor but buried in the Budget documents, from 2012 this £40,000 income limit will be withdrawn. It means that families with one child would receive no tax credits once they earn above £23,275.


Offpiste_man said...

However all these promises were made before the Coalition agreed to raise the income tax threshold. I think the net impact will be that people will be better off. Tax credits are a bureaucratic nightmare anyway.

Sunder Katwala said...


Thanks for your comment.

I would challenge that. After all, there were also clear statements about having no need and no plans to raise VAT.

And most people lose more on VAT than they gain on the threshold change, so I don't think the threshold change can be offered as a reason to break a very clear promise on tax credits.