Some wise words in this articel in today's papers:-
"Maybe the political repercussions of the cuts to tax credits were unavoidable. After all, when people have been receiving regular government payments – even for a short time – they come to see them as a right and to base their life expectations around them. This was never going to be easy. Especially when these payments were being made to people who had chosen to work rather than be unemployed: in other words, precisely those whom the Government had been determined to praise as doing the right thing. So yes, this was always going to be a much more contentious step than the changes to benefits for those who were not in work.
Those earlier reforms fitted neatly into the Conservatives’ clearly enunciated philosophy of discouraging welfare dependency as a lifestyle choice. The public was overwhelmingly on board, believing the changes to be socially responsible and morally sound. That was the easy bit. But it was never going to be the answer, by itself, to the problem of wildly escalating welfare costs.
It is too late to correct the impression that the Conservatives wanted to perpetrate a hard-hearted penalty on the working poor
It was the huge programme of in-work benefits that needed to be dismantled if there was to be any hope of getting expenditure under control – which is what George Osborne keeps saying. Unfortunately, that is pretty much all he is saying. The refrain is repeated over and over again: if we want to have more money to spend on health, education and national infrastructure, we must be prepared to reduce the enormous cost of tax credits, which has increased from £7.1 billion (in present currency values) in 1996/7 to £30.6 billion today. Working tax credits now account for 15 per cent of all social security spending. This is obviously out of control and unsustainable. Then the Chancellor usually adds the mantra of the moment: what we need is a low-welfare, low-tax, high wage economy.
All of this is absolutely sensible. But it still sounds callous and inconsistent with everything that has been said previously about not penalising people who are doing the right thing (i.e. working for a living). What it implies is that the Government is prepared to get the economy into surplus, and release more money for health, education, etc, on the backs of the lowest-paid workers in the country. Those households already struggling to subsist might be about to lose, quite suddenly, what would seem to them a significant proportion of their income.
However much the Tories tried to counter this fact with the promise of higher income tax thresholds and an increase in the minimum wage, they were clearly unable to state that nobody, in the short-term anyway, would lose out. So clearly something will now have to happen to soften the effects – but the political damage is done. It is too late to correct the impression that the Conservatives wanted to perpetrate what appears to be a hard-hearted penalty on the working poor without thought for the immediate consequences on people’s lives.
Could this have been handled better? You bet. What was missing from the Osborne defence was a very persuasive moral argument against government topping up low wages and thus creating a low-pay trap. The economist Arthur Laffer has said: “If you pay people to be poor, you will get more and more poor people.” He was referring specifically to the benefit-dependent underclass held in permanent poverty by the welfare system that created perverse disincentives to work. But the same principle applies to tax credits: if you pay people to be low-paid, you will get more and more low-paid people. Instead of low-wage jobs simply being an entry point to employment, or a temporary stop-gap at particular stages of life, they become the permanent condition of a whole tranche of the population.
Because low rates of pay automatically trigger the government tax credit system – raising the total income to an acceptable level – there is no pressure on the employer to offer more or the worker to seek anything better. Quite the opposite, in fact. As with all welfare systems, the cut-off points act as disincentives. Because increased earnings meant loss of tax credits there was, under Labour, a constant raising of the eligibility threshold until, as David Cameron pointed out in the Commons last week, even some well-remunerated MPs were entitled to them.
This is the absurdity that direct government pay supplements eventually reach if no one has the nerve to hold the line (or, in Gordon Brown’s case, if someone actually wishes to create a political dilemma for any future government). But the ludicrousness of the situation is not as serious as the socially disastrous consequence.
It is probably the case that more people are now imprisoned in the low-pay, tax-credit-dependency trap than are locked into unemployment by out-of-work benefits. So instead of a dynamic employment pattern in which people enter the job market at the low-pay end (or drop into it temporarily for other reasons) and then work their way up and out of it, making room at the bottom for more new entrants, we have a permanent caste of low-paid workers who are being paid by the government to stay where they are. This is crazy – and it is certainly not compassionate. If it’s social mobility you want, this is no way to get it.
Add to that the perennial curse of government welfare programmes: they lend themselves to misuse. Wherever there is a universal entitlement available there will be ways of gaming the system. One particularly ingenious (and perfectly legal) way to become eligible for tax credits is to be self-employed but earn no profit on your business. By being a registered self-employed person who earns little or nothing, you are entitled to have your income supplemented by government both in the form of the Working Tax Credit and, if you have a family, Child Tax Credits. What, you may wonder, could be the point of continuing in such self-employment when it is earning nothing? Exactly this: were you to be unemployed, the new benefit rules would see to it that you were continually pressured into seeking work.
Government entitlements lend themselves to manipulation and work-rounds
The local Job Centre would be calling you in for regular appointments, wanting to send you on interviews or training schemes and demanding to know how much effort you were making to find a job. But if you are unprofitably self-employed, nobody pesters you at all. In effect, your entire income is coming from the state without any of the hassle of being officially unemployed.
Needless to say, I am not suggesting that every self-employed person who is in receipt of tax credits is engaged in this practice. What I am saying is that government entitlements (particularly large-scale programmes, which are difficult to police) lend themselves to manipulation and work-rounds: wherever there is free money, there will be methods of obtaining it that subvert the original object. And knowledge of those methods will spread until they are commonplace.
In his Autumn Statement, the Chancellor is clearly going to do something to ameliorate the impact of these cuts on families who have become dependent on a vastly expanded benefits system. It was a previous government that installed these payments but it is the moral responsibility of the present one to see to it that those who – through no fault of their own – now rely on them are not pushed into hardship. I only hope that Mr Osborne manages to do this without looking as if he is being sulkily forced to admit that he was outplayed in the Westminster game. There is a perfectly sound ethical and social case for putting a stop to a system that perpetuates low wages and locks the working poor into a permanently hopeless position at the bottom of the economy. His original intention was right. He should defend it for the right reasons. "