MPs are to debate proposed cuts to Iain Duncan Smith’s flagship Universal Credit, it was announced on Tuesday.
Chancellor George Osborne has been forced to rethink tax credit cuts for millions of working families, after Lords voted to delay the changes.
Mr Osborne is now considering taking around £1.5bn from the Universal Credit budget, as a way of “softening” the blow of tax credit cuts.
The plans would see the taper rate increased from 65% to 75%, meaning claimants would lose 75 pence for every £1 earned over the earnings threshold for Universal Credit.
Labour has hit out as the plans, after figures revealed that the changes could cost some families more than £700 a year.
Figures compiled by the House of Commons library, show that a single parent earning the minimum wage with two children is already set to lose £2,400 a year from Government cuts.
Increasing the taper rate for Universal Credit to 75% would push up those losses to more than £3,100 a year from 2016.
Labour’s Shadow Work and Pensions Secretary, Owen Smith MP, said “cutting universal credit in this manner will mean even greater losses for millions more families”.
He added: “It will introduce an effective tax rate of well over 80% and cause more costly delays to a project that’s already well over budget.”
Labour’s analysis does not include measures announced by the Chancellor in the Summer Budget – such as increasing the personal tax allowance and the introduction of a so-called ‘National Living Wage’.
However, the Institute for Fiscal Studies warned earlier this year that the NLW would not fully compensate families for losses incurred by cuts to tax credits.
William Elming, a research economist at the IFS, said: “The new ‘National Living Wage’ will only offer partial compensation to working age households who will see their incomes fall as a result of tax and benefit changes announced for the current parliament.”
The IFS also said the new NLW is likely to depress GDP and employment.
Osborne’s plans to increase the taper rate has also divided his own party, with the former Environment Secretary Owen Paterson warning “it kills stone dead the narrative that we are on the side of people who work”.
“The Treasury has already increased the amount it takes back from 55p to 65p for every pound they earn and now wants to raise it to 75p”, said Paterson.
He added: “It’s not worth the candle. It is a step back to the days of marginal tax rates of up to 90% under Labour”.
Iain Duncan Smith has allegedly threatened to resign if George Osborne raids the Universal Credit budget, over fears it could reduce the ‘work incentive’ for claimants. Osborne has since tried to play down suggestions of a rift between the Treasury and Department for Work and Pensions.
The Government has now agreed to a parliamentary debate on Osborne’s proposal to slash Universal Credit to mitigate tax credit cuts.
Responding to the announcement, Emily Thornberry MP, Labour’s Shadow Employment Minister, said: “The Government’s U-turn on allowing a debate on cuts to Universal Credit is welcome.
“These drastic proposals could cause some of the lowest-paid working households to lose thousands of pounds a year, even with the higher minimum wage.
“We have been waiting for years for Universal Credit. It was supposed to be a new, simpler universal safety net, but most importantly it was supposed to make sure that it paid to work.
“If these cuts go through, many families will simply end up significantly worse off even if they work full-time.”