Tax Credits: let’s focus on the long term

“Cuts to Tax Credits look like they are here to stay – so let’s get the government to push policies that can help create a UK labour market where families can get by without them.”

The recent press frenzy over tax credits cuts, announced in July’s Summer Budget, is somewhat surprising. It seems to have come as an aftershock to many commentators that families are going to see the amount they receive from the state (and in some cases their total income) reduced. But what were people expecting?

The Conservative manifesto commits the government to deliver further welfare cuts in the region of £12 billion, on top of the £20 or so billion carried out under the coalition between 2010 and 2015. The fundamental fact is that once you decide to cut benefits, and overall government expenditure, there will always be people who lose out, unless something else changes. The simple maths dictates that.

This will lead to a difficult situation for many families, and I can’t say that I agree with all the choices that have been made (indeed, if in power, I’d make distinctly different choices). But after being elected on a platform of welfare and tax cuts, the government is starting to deliver exactly that.

The current focus on tax credits, though an important issue, shifts attention away from what matters in the long term now that these changes are taking place. That is the “something else changing” I raised earlier. It follows that, if the government believes in a low welfare and high wage economy, cutting tax credits is a logical step – but the “something else” is that real help must now be given to families and individuals which will enable them to increase their hours and earnings in order to mitigate the impacts.

Of course, doing this will be difficult. The UK labour market and system of employment support does little to encourage progression from low-wage work to high-wage work. Neither does it focus particularly on helping people to increase their hours. We also have an historic problem of low skills, relatively low productivity and low wages. At the SMF, our work on in-work progression, self-employment and skills training seeks to address these issues.

These are the areas where serious policy work needs to take place and sorting these out will be central to the success or failure of the government’s ambition to create a high wage society.



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