QUIZZING THE CHANCELLOR ON CHANGES TO TAX CREDITS AND CHILD BENEFIT

Below is an extract of the Chancellor's evidence to this week's Treasury Select Committee. I questioned George Osborne on changes to tax credits and child benefits that will hurt hard working families: 

Q330 Mr McFadden: I want to ask you about the child benefit changes, Chancellor. You introduced this sliding scale between about £43,000 and £60,000 for people to lose their child benefit. You didn’t deal with the anomaly that a couple where one partner earns £60,000 or above will lose all their child benefit, but another couple, where two partners are earning £49,000, I believe, will keep it. Why is it fair for one household where the total income is almost £100,000 a year to keep child benefit, but another household where the income is £60,000 a year to lose all of it?

          Mr Osborne: First, between the higher rate threshold and £50,000 they keep their child benefit. We are talking about when someone in the family has an income of over £50,000. The child benefit is then in effect tapered away through a tax charge. The alternative, implied in your question, is to assess total household income for people on household incomes of £40,000, £50,000, £60,000, £70,000, which is not something that the Government do. We would have to create an entirely new system to assess the total household income of 6, 7, 8 million people. I do not think we need to do that. Let me be blunt: we do not assess the household income of anyone sitting around this table. The tax system does not do that because the welfare system does it. Of course, people on higher incomes are not in the tax credit system or the welfare system.

          The only way to remove child benefit from better-off families in a way that assesses household income is to create a system that means-tests every household and assesses every household income. I thought a simpler thing to do was to say, “If someone in your family has an income of over £50,000, we will taper away your child benefit through a tax charge.” That is a much more administratively simple way of doing it than means-testing every single household in the country. 

          Q331 Mr McFadden: But HMRC estimates that, as a result of what you have just outlined, an extra 500,000 people will have to fill out self-assessment forms. This is hardly a simplification, is it? We heard this morning that this adds significantly to the complexity of the tax system.

          Mr Osborne: Once you accept the premise—of course, there are some people who don’t accept the premise—and take the decision to remove child benefit payments from better-off families, and we are talking here about the top 10% of families by income, you then have to consider how best to do it. The alternative implied by your question would put 7 million or 8 million people into some form of household means test requiring a complicated form. Now, some people argue that we should not be taking money away from these people at all. 

          Q332 Mr McFadden: That is not what I am arguing. Some households earning almost £100,000 will keep it.

          Mr Osborne: My Labour opposite number makes that argument. I have to tell you that, without the child benefit change, people in the top 10% or 20% of the income distribution would not have made, in terms of the fiscal consolidation, any significant contribution. In other words, all the other changes would affect people on lower incomes. This is the one measure that affects people on the highest incomes, and I thought it was perfectly reasonable to ask people in the top 10% or 15% of the income distribution to make a contribution to the spending component of the consolidation. 

          Q333 Mr McFadden: Let me ask you about another cliff edge much further down the income scale. One of the measures that you didn’t change in the Budget but that is just about to come into force is the cliff edge for families with children where a parent works part time between 16 and 24 hours a week. Families in those circumstances are going to lose £3,800 a year in tax credits. Their average incomes are around £17,000 or £18,000 a year. The benefit to such families of changing the personal tax allowance is, I think, about £170 a year. These are, I stress, families in work. These are benefits for people in work. You said that the Budget was a Budget to encourage work. How can it encourage work to take away almost £4,000 a year from 200,000 families working part time?

          Mr Osborne: I completely accept that dealing with a budget deficit requires some very difficult decisions. The tax credit bill had gone up from £18 billion in 2003 to £30 billion by 2010. If you can propose to me a way of dealing with a 10% or 11% budget deficit without touching welfare spending—you and your party voted against the child benefit changes last night—and without touching a £30 billion tax credit bill, I have yet to hear it. These are difficult decisions. Of course, the cliff edge to which you refer exists at 16 hours, and it exists for lone parents at 16 hours and was introduced for couples by the Labour Government at 16 hours. We are not asking lone parents to work more than 16 hours, but we are asking couples to work more than 16 hours between them. Given the difficult decisions we have to make across the board, it is a reasonable thing to ask. 

          Q334 Mr McFadden: The purpose of welfare reform should be to encourage work. The effect of these changes if the families cannot get extra hours—surely you accept that in a constituency like mine, which is among the top 20 in the country for unemployment, getting extra hours of work is not easy—will be that many of these families will be better off on the dole. Surely the purpose of welfare reform should be to make work pay, rather than make the dole pay.

          Mr Osborne: I completely accept that the welfare system is not doing enough to encourage work. That is why we are introducing universal credit. The tax credit system has very high marginal withdrawal rates. That is why we are replacing it with the universal credit system. But your arguments about the cliff edge, frankly, are arguments you could apply whether it was 16 or 24 hours. They are exactly the same argument. I would say—let me put it this way—it was rather strange that the previous Government had decided that a single parent should work 16 hours and a couple should also work 16 hours.

          We have not changed the hours requirement for the lone parent, but we have changed it for the couple. I completely accept that these are difficult decisions, but if you are not prepared to tackle the tax credit bill and you are not prepared to tackle child benefit going to better-off people, and if you voted against the changes to benefit uprating from RPI to CPI, what exactly are you proposing that we do to deal with the fact that we were borrowing £1 in every £4 that we were spending? 

          Q335 Mr McFadden: We will probably come on to discuss the 50p rate in some detail in this session, but I will end with one question on it. Do you not think people will find it odd that the argument about the 50p rate is that to encourage work among not just the top 10%, but the very top earners above £150,000, we should cut their taxes and put more money in their pockets, but to encourage work among people who are earning £17,000 or £18,000 a year, it is necessary to impose a cut in their incomes of £4,000 a year? How do you think that makes the Government look?

          Mr Osborne: I would argue that the purpose of universal credit is also to reduce these high marginal tax rates that exist in the welfare system, so we are also trying to improve work incentives for people on welfare. I do not know whether you want to begin the discussion on the top rate of tax, but for Britain to have a top rate of tax that is higher than in France, Italy or Germany, that Robert Chote and his independent body assesses costs £100 million to reduce from 50p to 45p, and that is only the direct cost—indeed, the indirect cost in terms of forgone VAT receipts may mean it raised absolutely nothing, the gap between 45p and 50p—if we want to carry on with that rate just because it looks good on our press release, but makes our country deeply uncompetitive and damages jobs and growth in our economy, fine. My predecessor took the view that it should be temporary. I took the view that it should be temporary. We are removing it once the public sector pay freeze comes to an end next year. As I say, if you felt so strongly about it, Mr McFadden, you should have voted against it last night, as indeed your SNP colleague sitting next to you did. 

          Q336 Mr McFadden: I will just remind you of what your predecessor said in the debate last night. You are right—he did say he thought it should be temporary, but he also said he would not have withdrawn it when asking those further down the income scale to continue to make the kind of sacrifices that you are asking them to make, so I do not think he can be prayed in aid for the Budget that we have before us.

          Mr Osborne: The question was should Britain continue with a tax rate, which had been identified around the world as deeply uncompetitive and a deterrent to investment in Britain, simply to make Members of Parliament feel good that somehow they were levering a rate, which we know people were not paying. That work has been done independently of me. What I have instead tried to correct are abuses that have existed for years in the tax system, where people were able to claim unlimited tax reliefs to reduce their income tax rate to zero, not 50p to 45p, but people on incomes of £5 million or £10 million a year reducing their income tax rate to zero.

What I am trying to do is tackle those uncapped reliefs and make sure that we have a competitive top rate of tax. I think that is a fair way of dealing with the tax system. My numbers are audited by Robert Chote, and the score card shows that we are raising five times as much money from the wealthiest people in our country through the tax measures we announced in the Budget.

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