Tax credit reforms inquiry

The 2015 Summer Budget proposed cuts to in-work tax credits of £4.4 billion in 2016-17.

Even when combined with the welcome increase in the income tax personal allowance and the National Living Wage, these cuts would cost the average affected family £1,100, a reduction in income that many cannot afford. There is now general agreement that it would be right for the Chancellor to rethink reforms that went too far and too fast and may have most impact on those in work and striving to succeed.

The Chancellor has pledged to bring forward transitional measures in his Autumn Statement and there is widespread expectation that he may be willing to forgo some fiscal savings in the short term. In this Report, we consider the various mitigation options open to him.

Our analysis has been hampered by the inaccessibility of data about the effects of both the original proposals and potential mitigations. Government should do more to make data available, not least because it makes for better policy.

Some facts about mitigation are very clear. Increases in the income tax personal allowance and the National Living Wage should not be confused with compensation for tax credit cuts. These welcome measures help a large share of the population, but that share excludes many of those subject to the cuts. The benefits to those who are helped are generally dwarfed by the cuts, especially in 2016-17. Acceleration of those changes, or alterations to national insurance, will not wash as solutions. The Chancellor should also resist the temptation to raid Universal Credit: this would either shift the burden to different low income families or undermine the objective of making work pay. The only efficient and effective immediate means of mitigating the tax credit cuts lie within the tax credit system.

There is, however, no magic bullet in the tax credit system. Something has to give:

household incomes, work incentives or fiscal savings. We recommend that, if these major changes cannot be satisfactorily mitigated now, it would be better to pause any major reforms until 2017-18. This would enable a necessary and ambitious debate about the future of working age benefits, and their position in a sustainable welfare system. This Report starts that debate.