Friday, 6 April 2012

Working Tax Credits versus the Rise in Personal Allowances, Who Gains?

This week the worried calls were coming into my constituency office. The combination of cuts, freezes and rule changes coming into force on Friday amount to one of the most ruthless assaults on the finances of low- and middle-income families ever seen. Coming on top of austerity measures that have already hit ordinary families the hardest – including a VAT hike costing them an average £450 every year – they are set to deepen a cost of living crisis with which many are already struggling.

Perhaps the cruellest measure is the withdrawal of working tax credit from couples with children who can't increase their working hours to a new, higher threshold of 24 per week. When George Osborne first announced this measure in 2010, he assumed the economy would be booming by the time it took effect. But the government has refused to reconsider the change, even though its failed policies have delivered a stalled economy with rising unemployment, with many more employers now cutting hours rather than offering extra shifts.

In my own constituency of Leeds West, 285 families could see their weekly income fall by £73 as a result. Around the country as many as 212,000 families – including about half a million children – are at risk of being casually dropped below the poverty line as a result of this single measure. There is no starker illustration of how this out-of-touch government is letting families on low and modest incomes pay the price of its own economic failures.

Other measures mean that anyone relying on tax credits or child benefit is affected in one way or another. More than 850,000 families with incomes above £26,000 (if they have one child) or £32,000 (if they have two) are losing all their child tax credit – contrary to David Cameron's promise during the last election that only those with incomes of more than £50,000 would be affected. Child benefit payments, as well as the main elements of the working tax credit, are being frozen for a second year, falling further behind the rising costs of food, fuel and fares.

Households being hit from all sides like this will see the coalition's headline policy of raising the personal allowance – worth just 82p a week in real terms – as slim compensation. And indeed, new analysis from the Institute for Fiscal Studies confirms that, overall, the gains resulting from the higher personal allowance are cancelled out many times over by losses caused by other changes: as of Friday families with children are, on average, £511 worse off when all this government's changes in the new tax year are taken into account.

The excuses offered by Conservatives and their Liberal Democrat partners are that this is all necessary to get the deficit down. But by raising taxes and cutting spending too far and too fast, they have choked off the recovery and added £150bn to their own borrowing plans. This will hardly be helped by cutting tax credits designed to ensure work pays – meaning thousands of families will be better off leaving their jobs and claiming unemployment benefit.

At the same time they are giving a £3bn tax cut to the highest earners in the country– a boost of more than £42,000 a year to those with incomes of a million – on top of paying £1.6bn more in pensions tax relief to people with incomes of over £150,000. Osborne talks about encouraging "work and enterprise", but it seems different rules apply to the millions trying to earn whatever they can to give their children a decent chance.

People are coming to the conclusion that this government finds it easier to empathise with people who find it hard to get by on more than £150,000 a year than with the rest of the population, who are now struggling with the consequences of its unfair choices and failing economic policies.

Written by Rachel Reeves
Labour MP for Leeds West

First published in The Guardian

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