Tax credit cuts and universal credit

Any cuts to tax credits will not be as harsh as universal credit already is

Cuts to tax credits are still firmly in the news ahead of Wednesday’s autumn statement. While we wait to see what George Osborne comes up with in response to the outcry against the cuts, and with potential amendments to his policy being thrown around by all manner of people, it is worth looking at how these changes fit in with the overall welfare reform programme. Tax credits are not being changed within a vacuum and looking at the wider context gives us more understanding of what these changes mean.

Child tax credit and working tax credit are in the process of being abolished. In the Government’s original timetable for universal credit (UC), tax credits should have been removed from the benefit system by 2017 although various delays have meant pushing the eventual end point to, maybe, 2021. Either way, many people will start receiving universal credit instead of working tax credit or child tax credit in the next few years. In fact, there are already people on universal credit who would otherwise have been claiming tax credits. Those who joined the UC scheme as jobseekers and who have now moved into work for instance, do not generally claim tax credits. UC has replaced both jobseeker’s allowance and working tax credit for them.

Why is this relevant to the current debate around the tax credit cuts? Well, it’s important because universal credit is the long term future of benefits. Those receiving tax credits now will lose them soon whatever happens and will have to claim universal credit instead. Not discussed enough in the tax credits debate is the point that UC is a much less generous scheme if you are working than the tax credit schemes are. These cuts bring tax credits much more closely in line with the universal credit plan for benefits and should have been what we were expecting. We have known about the Government’s plans for in work benefits since the 2013 Universal Credit Regulations at least. Indeed, anyone who supports the introduction of UC in anything close to its current incarnation should have no issues with the cuts to tax credits which are, even with Osborne’s cuts, still more generous in terms of work incentive than UC.

Full time workers lose out if tax credits cut but may lose even more under universal credit

As an example, a couple with two children who both work 35 hours at the new National Living Wage rate who pay out £200 per week for childcare (a family championed by the Government as one of the biggest winners in the new system) currently receive around £10,000 in tax credits per year. If George Osborne’s tax credit cuts are brought in without amendment, that family will instead receive just under £7,500. Under universal credit, that same family would receive just £6,500. A substantially greater cut than even the most severe of Osborne’s tax credit cuts.

This comparison is complicated by the interaction of different benefits and credits. Most important of which is the support for those in rented housing. If the couple discussed above were renting a property for £100 per week, they would receive no help with housing under the current tax credit system. With Osborne’s cuts in place they would receive almost £1,500 a year in housing benefit, that they were never entitled to before (assuming they realise they are entitled and make a claim to it – which is a whole other issue concerning increasing benefit awareness). This brings their income back up to around £9,000 when you add it to their tax credit award. Under UC their income would also be around £9,000 including the increased help towards their housing costs.

Support for housing costs in the rented sector then, helps to mitigate some of the tax credit cuts and the poorer work incentives under UC. Our example family who do not pay rent, maybe they own their own home or have a mortgage, lose out on thousands of pounds from the tax credit cuts and even more under universal credit. Our renters lose about £1,000 whether they are on universal credit or tax credits. Losing £1,000 is a major loss of income but the Government’s flagship benefit policy has always had couples in full time, low paid work losing out significantly. Those who we could call “hardworking, home-owning families” lose significantly more. This may seem an unexpected group for a Conservative Government to target with cuts but it has been a plain fact for several years now.

Opposing tax credit cuts but supporting universal credit is unsustainable

There are other examples that can be drawn to show slightly different scenarios but the general point remains – opposing cuts to tax credits but supporting UC in anything like its current form is a contradictory argument. The tax credit cuts may be severe but UC is as bad or worse for many people. Crucially any short term fix to lessen the impact of tax credit cuts that comes at the cost of making UC less generous will have a significantly more detrimental impact on low income working households than the very cut it is attempting to replace.

These new cuts have been highly controversial but all they are doing is bringing the intended policy in to the current system ahead of the transition to UC. If the intended UC timetable had been kept to, we would have seen these changes in effect long before now and the treasury would have some of its planned savings already. The failure to meet those targets has brought this policy about.

Iain Duncan-Smith has repeatedly said that “no one will lose out under universal credit”. By making tax credits worse now, George Osborne is ensuring he comes closer to the truth, but UC is much less generous than tax credits and will be even after the cuts likely to be announced on Wednesday.