The Tory Government should “pause” and rethink its plans for a major overhaul of the tax credit system for over a year, MPs have said.
In a unanimous cross-party report, MPs from the Work and Pensions Committee say there is an absence of satisfactory mitigation measures to help families who will be worst affected.
The report follows embarrassing defeats for the Government in the House of Lords, where Peers recently voted to force the Government into delaying tax credit cuts.
MPs say mitigating measures outlined by Chancellor George Osborne in the Summer Budget, such as an increase to the personal tax allowance and a so-called ‘National Living Wage’ (NLW), will be “dwarfed” by the planned cuts to tax credits.
The report says an increase in the income tax personal allowance and the NLW “should not be confused with compensation for tax credit cuts”, because families will start to lose tax credits if their combined household earns as little as £3,850.
Single parents are also set to lose out from the changes. A single parent with 2 children working 35 hours will see their income rise by £323 pounds a year under the NLW, but will lose £1,701 in tax credit cuts, leaving the family £1,378 worse off.
Only around a third of households affected by tax credit cuts would benefit from the NLW, the report says. The majority of families will be left £1,500 a year out of pocket, despite of any mitigating measures.
MPs also warned against raiding the Universal Credit budget to ‘soften’ the blow of tax credit cuts, which they say would shift the burden of cuts to different low-income families.
Osborne has signaled his intention to increase the taper rate for Universal Credit from 65% to 75%, meaning claimants would lose 75 pence for every £1 earned over the earnings threshold for Universal Credit.
However, the Work and Pensions Committee says this would “undermine the objective of making work pay”, by “removing a higher share of earned income”.
The Committee criticised the Government for failing to provide data about the effects of mitigating measures on different income groups. This “is not consistent with effective scrutiny or effective policy-making”, said MPs.
The report added that the Government “is reaching the limits of cuts that can be made to the working-age welfare system”, while spending on pensioner benefits continues to rise sharply – a situation the committee says is unsustainable.
Frank Field MP, Chair of the Committee said: “No one has been able to provide the Committee with a satisfactory series of mitigating policies to combat the impact of cuts in tax credits next year.
“My advice to the Chancellor would be to pause and use the next 18 months to bring forward a major overhaul to abolish tax credits as we know them.
“A new system could come in fully by 2020 when the Chancellor’s National Living Wage will be paying a wage of £16,000 per year. This would allow him to question whether a reformed tax credit system shouldn’t be remodelled to help only lower earning families with children.”
Conservative MP Heidi Allen, a member of the committee, said: “The Government now has an opportunity to rethink its approach to tax credits and find a solution that does not impact so severely those on low pay.
“To maintain the economic growth we have worked so hard to achieve, it is vital that we keep everyone working. We are at a critical point in our recovery and this would be jeopardised if we returned to the bad old days of being “better off out of work.
“I know there are no easy answers, but I sense the majority of people in this country would back the Chancellor if he revisited other possible areas of savings; budget surplus levels or Inheritance tax thresholds for example.
“We talk so often about “all being in this together”: now is the time to put that mantra into action.”