The state is "doing a Robert Maxwell" on doctors' pensions

What difference does it make if you or I think that doctors get paid too little or too much? They had an agreement.

Last month I re-read Maurice Sendak’s Where The Wild Things Are. A meaningless gesture to an author, sadly, now gone. I always remember being annoyed and confused as a child, reading the bit where Max joins the eponymous Wild Things in mindlessly destroying their own homes in a “wild rumpus”. The casual irrationality still makes no sense to me.

I find myself harbouring similar frustrations watching the debate over the doctors’ industrial action today. Conservative MPs, one after the other, condemned the strike in the strongest and least constructive terms. Maybe you have sympathy with their arguments; maybe you think doctors have a pretty cushy deal. Conversely, perhaps you think there is something to the notion that a vocation the skills for which take many years to attain, which involves long hours and difficult conditions, ought to be well rewarded.

Whatever your position, there is one argument which is almost never articulated. And it is, strangely enough, an argument which is absolutely vital to the system those same right-wing advocates support. It is this: Doctors have an agreement on their pensions; a freely entered into bargain with the nation’s largest employer – the state.

When I graduated, I had options. Career paths which led to expensive cars and summer homes in the South of France gleamed ahead of me. I chose instead to join the Civil Service, knowing that my earnings would always hover between 30 per cent -50 per cent lower than someone of equivalent experience in the private sector. I did so, partly because I knew I would find the work more fulfilling, but partly because I took stock of the environment within which I would function, the relative job security and, yes, the relatively generous pension scheme.

After a change of career, I am happily not in a position where 20 years later, having fulfilled more than half of my part of bargain, my employer can turn around and unilaterally change the terms of the agreement. But make no mistake – this is precisely what is happening to doctors. The state is effectively "doing a Robert Maxwell". Doctors are being screwed out of something that they thought had been agreed and was kept safely aside for their old age. And they have every right to bitch about it.

The contract is the cornerstone of free-market capitalism. Those eroding its solidity at the state level are engaging in an act of utter folly. The very same people who claim to be advocates of entrepreneurship and small business, are reducing the ground on which those concepts are built to quicksand. How would small businesses feel if their customers, after a product or a service had been supplied, turned around and said "I think I agreed to too high a price, times are hard, I’ll just pay you half and there is nothing you can do about it"?

Nothing exempts the state from being responsible for its contractual obligations. There is no excuse for those who tout “market confidence” as a vital goal to claim that the basic principle which underpins it, does not apply to them. There is no intellectual consistency in arguing one day that one should not interfere with corporate salaries and bonuses because these Captains of Industry possess rarefied skills, while devaluing the skill of the person who can restart your heart after it has stopped.

What difference does it make if you or I think that doctors get paid too little or too much? They had an agreement – same as you do with your employer, with the garage that fixed your car, with the travel agency through which you booked your holiday. The fact that their agreement is huge and involves tens of thousands of employees should make it more, not less sacrosanct.

Now, there may be intervening reasons which make the breach inevitable. There may be mysterious forces majeures, which mean there is no money in the coffer for doctors, while there is for cutting the top rate of tax. But such a position needs to be fully explained.

And any renegotiation of such contracts must start with a full admission that the state got it wrong and a plea for doctors’ understanding. Rather than an arrogant shrug of the shoulders and a cynical attempt to make people fighting for what is legally theirs look bad in the press. A change of administration does not vitiate the state’s contractual responsibilities.

So, those Wild Things peddling their views from television studios to Whitehall lawns, need to take a step back and assess, truly assess, the effects of their attitude on future recruitment, on consumer spending, on market confidence and on the free-market capitalism which they worship. Truly assess the consequences of their position. Because their true position is that a contract with the UK’s biggest employer, biggest buyer of goods, biggest procurer of services, is not worth the paper on which it is written.

Doctors. Photograph: Getty Images

Greek-born, Alex Andreou has a background in law and economics. He runs the Sturdy Beggars Theatre Company and blogs here You can find him on twitter @sturdyalex

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Q&A: What are tax credits and how do they work?

All you need to know about the government's plan to cut tax credits.

What are tax credits?

Tax credits are payments made regularly by the state into bank accounts to support families with children, or those who are in low-paid jobs. There are two types of tax credit: the working tax credit and the child tax credit.

What are they for?

To redistribute income to those less able to get by, or to provide for their children, on what they earn.

Are they similar to tax relief?

No. They don’t have much to do with tax. They’re more of a welfare thing. You don’t need to be a taxpayer to receive tax credits. It’s just that, unlike other benefits, they are based on the tax year and paid via the tax office.

Who is eligible?

Anyone aged over 16 (for child tax credits) and over 25 (for working tax credits) who normally lives in the UK can apply for them, depending on their income, the hours they work, whether they have a disability, and whether they pay for childcare.

What are their circumstances?

The more you earn, the less you are likely to receive. Single claimants must work at least 16 hours a week. Let’s take a full-time worker: if you work at least 30 hours a week, you are generally eligible for working tax credits if you earn less than £13,253 a year (if you’re single and don’t have children), or less than £18,023 (jointly as part of a couple without children but working at least 30 hours a week).

And for families?

A family with children and an income below about £32,200 can claim child tax credit. It used to be that the more children you have, the more you are eligible to receive – but George Osborne in his most recent Budget has limited child tax credit to two children.

How much money do you receive?

Again, this depends on your circumstances. The basic payment for a single claimant, or a joint claim by a couple, of working tax credits is £1,940 for the tax year. You can then receive extra, depending on your circumstances. For example, single parents can receive up to an additional £2,010, on top of the basic £1,940 payment; people who work more than 30 hours a week can receive up to an extra £810; and disabled workers up to £2,970. The average award of tax credit is £6,340 per year. Child tax credit claimants get £545 per year as a flat payment, plus £2,780 per child.

How many people claim tax credits?

About 4.5m people – the vast majority of these people (around 4m) have children.

How much does it cost the taxpayer?

The estimation is that they will cost the government £30bn in April 2015/16. That’s around 14 per cent of the £220bn welfare budget, which the Tories have pledged to cut by £12bn.

Who introduced this system?

New Labour. Gordon Brown, when he was Chancellor, developed tax credits in his first term. The system as we know it was established in April 2003.

Why did they do this?

To lift working people out of poverty, and to remove the disincentives to work believed to have been inculcated by welfare. The tax credit system made it more attractive for people depending on benefits to work, and gave those in low-paid jobs a helping hand.

Did it work?

Yes. Tax credits’ biggest achievement was lifting a record number of children out of poverty since the war. The proportion of children living below the poverty line fell from 35 per cent in 1998/9 to 19 per cent in 2012/13.

So what’s the problem?

Well, it’s a bit of a weird system in that it lets companies pay wages that are too low to live on without the state supplementing them. Many also criticise tax credits for allowing the minimum wage – also brought in by New Labour – to stagnate (ie. not keep up with the rate of inflation). David Cameron has called the system of taxing low earners and then handing them some money back via tax credits a “ridiculous merry-go-round”.

Then it’s a good thing to scrap them?

It would be fine if all those low earners and families struggling to get by would be given support in place of tax credits – a living wage, for example.

And that’s why the Tories are introducing a living wage...

That’s what they call it. But it’s not. The Chancellor announced in his most recent Budget a new minimum wage of £7.20 an hour for over-25s, rising to £9 by 2020. He called this the “national living wage” – it’s not, because the current living wage (which is calculated by the Living Wage Foundation, and currently non-compulsory) is already £9.15 in London and £7.85 in the rest of the country.

Will people be better off?

No. Quite the reverse. The IFS has said this slightly higher national minimum wage will not compensate working families who will be subjected to tax credit cuts; it is arithmetically impossible. The IFS director, Paul Johnson, commented: “Unequivocally, tax credit recipients in work will be made worse off by the measures in the Budget on average.” It has been calculated that 3.2m low-paid workers will have their pay packets cut by an average of £1,350 a year.

Could the government change its policy to avoid this?

The Prime Minister and his frontbenchers have been pretty stubborn about pushing on with the plan. In spite of criticism from all angles – the IFS, campaigners, Labour, The Sun – Cameron has ruled out a review of the policy in the Autumn Statement, which is on 25 November. But there is an alternative. The chair of parliament’s Work & Pensions Select Committee and Labour MP Frank Field has proposed what he calls a “cost neutral” tweak to the tax credit cuts.

How would this alternative work?

Currently, if your income is less than £6,420, you will receive the maximum amount of tax credits. That threshold is called the gross income threshold. Field wants to introduce a second gross income threshold of £13,100 (what you earn if you work 35 hours a week on minimum wage). Those earning a salary between those two thresholds would have their tax credits reduced at a slower rate on whatever they earn above £6,420 up to £13,100. The percentage of what you earn above the basic threshold that is deducted from your tax credits is called the taper rate, and it is currently at 41 per cent. In contrast to this plan, the Tories want to halve the income threshold to £3,850 a year and increase the taper rate to 48 per cent once you hit that threshold, which basically means you lose more tax credits, faster, the more you earn.

When will the tax credit cuts come in?

They will be imposed from April next year, barring a u-turn.

Anoosh Chakelian is deputy web editor at the New Statesman.