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Tax Credits

October 22, 2015

For those constituents seeking Mark’s views on the tax credit proposals put forward by the government.

Dear Resident,

Thank you very much for your email about the government’s tax credit proposals.

I appreciate your concern that changes to the existing tax credits system might leave some people out of pocket. I thought it might be helpful if I first explain the history behind tax credits and then outline what the government is trying to achieve by reforming the system.

When working tax credits (essentially a system of negative income tax) were first introduced by the then-Chancellor, Gordon Brown, he faithfully assured parliament that their annual cost would not exceed £600 million. He saw tax credits as a way of ‘topping up’ the wages of part-time workers to that of almost full-time pay. The unintended consequence, however, was that tax credits began to have a starkly deflationary impact on wages. As employers realised that any shortfall between a statutory minimum wage entitlement and the wage level required to be ‘better off in work’ would be covered by the state, the cost to the government spiralled. Meanwhile employees became reluctant to accept pay increases or an offer of additional hours for fear of losing their tax credit payment. Far from the £600 million Gordon Brown promised, working tax credits alone are currently £11bn of an overall tax credits bill that costs the Exchequer £30 billion annually.

The government now has to tackle both the strain this places on the public finances and the culture of reliance on the state that has been created even for people in work. In this regard, it is vital that tax credits are viewed not in isolation but as part of an overall package that unpicks welfare dependency, supports working people and gets the public finances back on track. It simply does not make sense to take tax from low earners and hand it back to them in the form of tax credits via a horribly complex system.

Alongside a withdrawal of tax credits, therefore, comes an increase in the personal tax allowance that will see those working full-time on the lowest wages taken completely out of income tax. In addition, there will be a hike in the minimum wage when the National Living Wage is introduced from next year, starting at £7.50 an hour. The aim is to ensure that higher wages play a far greater role in boosting living standards, with tax credits’ scope much smaller in future. Meanwhile, social housing rents are being frozen and free child-care is being doubled to help those who could previously work only part-time take on more hours. It is hoped the latter change will assist in mitigating the impact on any families affected by these proposals.

However as this transition gets underway, I accept it would be disingenuous to suggest that some families will not be losing out. It is thought the most seriously impacted will lose around £30 a week and the government will be supporting those groups to take on additional hours to make up the shortfall until our related measures on wages and tax fully kick-in. As you know, this Conservative government has always been clear in its determination to put the public finances back on a sustainable footing and in doing so, there are no easy choices. If we shied away from dealing with the tax credits issue, which takes up such a substantial chunk of the welfare budget, it would have to find billions of savings elsewhere and risk undermining its task of making work pay by the end of this parliament. As a consequence I shall continue to support what the government is trying to do. Nevertheless there remains live discussion within the Party about what should be done to mitigate the impact of tax credit changes during the transition period.

I am very sorry that this answer will be one that disappoints you and I am grateful to you for taking the time to write to me and share your strongly-held views.

With kind regards,

MARK