Spending Review: Tax credits 'smoke and mirrors' claim

Chancellor George Osborne.
Chancellor George Osborne.

CHANCELLOR GEORGE Osborne has made a dramatic U-turn on his planned tax credit reforms but critics say families could still suffer as the Government seeks to phase out the benefit.

In one of the most dramatic moments of his Autumn Statement, the Chancellor said he would leave the tax credit arrangements untouched, an indication that his crushing defeat in the House of Lords had a significant influence on his approach to welfare.

A Treasury spokesperson said the country’s improved financial situation meant that the Chancellor was in a position to mitigate against tax credit changes, which the Institute for Fiscal Studies had previously estimated would leave families £1,300 worse off.

Mr Osborne, who used his speech to say he represented the working people of Britian, said: “The improved public finances allow us to reach the same goal of a surplus while cutting less in the early years. We can smooth the path to the same destination. And that means we can help on tax credits.

“I’ve been asked to help in the transition as Britian moves to the higher wage, lower tax society the country wants to see. I’ve listened to the concerns. I hear and understand them. And because I’ve been able to announce today an improvement in the public finances, the simplest thing to do it not to phase these changes in, but to avoid them altogether.”

Critics who feared the tax credit reforms would hit working families have welcomed the decision to leave the policy alone. However from April 2018, new claimaints will not be given tax credits, and instead they’ll be switched over to the new Universal Credit benefit, which Paul Johnson, director of the Institute for Fiscal Studies said will be ‘less generous’ than it would have been’.

Until that point however, the cost of retaining the credits will be offset by changes to a variety of other welfare benefits including a modest change to housing benefit, and this has the backing of the Office for Budget Responsibility, the Treasury spokesperson confirmed.

However Labour say that £1bn is still being taken from working families next year, and over £3bn will be taken by the next Parliament - something the Treasury disputes.

The party describes it as a ‘smoke and mirrors’ review of the controversial policy, and not a full reversal of plans.

In the summer the Government pledged to take away £4.4 billion in 2016-17 from the tax credit bill, which would have hit 3 million working families, however the Government has only pledged to scrap the reform to the value of £3.4bn - leaving the £1bn shortfall.

Owen Smith MP, Labour’s Shadow Work and Pensions secretary, said: “I welcome the fact that the Chancellor has bowed to Labour pressure and reversed the immediate unfair cut to tax credits.

“However, this is not the full and fair reversal we demanded, as he is still taking £1 billion from working families next year and over £3 billion by the end of the Parliament, as tax credits are replaced by universal credit.

“As a result, a single parent of two children working full time on the Minimum Wage on Universal Credit will lose £2,400 next year due to the Chancellor’s cuts.”

He said the Autumn statement was nothing but a ‘smoke and mirrors’ review and failed to address the big challenges facing the country.

It is understood Labour's calculations are based on a comparison between financial situations which are now almost six months apart.