Don't look to François Hollande for inspiration, Ed

The French Socialist leader is a throwback, not a pioneer.

On Wednesday, François Hollande’s budget announced the doubling of a tax already planned by Nicolas Sarkozy, giving a sliver to the state of certain transactions executed in financial markets. So what, you say. Banks can afford it, can’t they? Besides, they messed up: they should pay. But it’s not that simple: like VAT or any other sales tax, the cost is simply passed on to the buyer; a paltry half-billion euros will be raised annually and the law is full of loopholes. Plus, the original Sarkozy tax was only scheduled to come into force the same day, so no-one yet knows what the effects are.

Clearly, there is a political point being made that banks must pay for their sins, but: at what cost? The advantages of a financial transactions tax are unproven, to say the least. At best, it seems like posturing: at worst, it adds to the cost of companies, and the country, raising capital, affecting growth and competitiveness. Plus, with a unilateral move, there is always the danger that people will simply take their business elsewhere, which is why no-one here – not even Miliband –  is suggesting such a unilateral tax for the City, a financial centre which easily dwarfs Paris.

Perhaps, then, it’s a good moment to take a closer look at the Hollande administration. He has, at least, one sensible positive: his belief that growth is the key rather than austerity. Good. However, unlike the UK, Eurozone rules cap his borrowing, meaning next year he needs to make €33bn of cuts. So one wonders how he can fulfil pledges which require him to spend to achieve that growth.

Then there’s his manifesto proposal for a 75 per cent “super tax” for earnings over €1m, a move not seen in Britain since the days of Denis Healey (that said, his own advisor, Harvard’s Prof. Philippe Aghion, admits it was probably just an electoral sop to the left that he didn’t really mean). But many suggested that Hollande’s manifesto largely comprised things he would not really implement, and which he now has. And these are nothing compared to Hollande’s decision to lower the national retirement age from 62 to 60, which gives an insight into some very flawed thinking, because it doesn’t seem to make sense at the level of basic maths. The explanation is quite simple and goes like this:

If I pay a portion of my salary towards a pension, I create a pot, which the government looks after for me. When I retire, that pot buys me a pension until I die, the level of which depends on the size of the pot. Four things determine the size of my pot: the percentage I pay in from my salary; the number of years; the amount I work each year (working hours, holidays, and so on); and the fourth and final thing is the number of years I’m likely to live – the more years, the bigger pot I’ll need.

The problem is in the fourth factor. Most national pension systems in the western world are broke, and are on the verge of not being able to pay out to all the pensioners. They didn’t quite count on so many people staying alive so long, so they under-provided. Most governments are therefore trying to find ways to fund the “pensions time-bomb”, by getting more money into each person’s pot.

So, what you’ve got to do is change one of the first three factors. But in France, the amount you work each year is already fixed at a relatively low level, because of its uniquely-constricting thirty-five hour week and generous statutory holidays. Then there’s the number of years you work, which in France we have just reduced by two. That leaves only one thing: to increase national insurance; raise taxes on those who are working to pay for those who aren’t – which is not really sustainable (particularly during an economic crisis). For this reason, policymakers worldwide are accepting an inevitability: people will have to work longer.

Ah, but not in France. Not in the homeland of Lagrange, Fourier and Descartes, where mathematics nowadays apparently work differently. Or rather, the raising of pensionable age makes no sense at all, because sooner or later the government will have to reverse it, as will all governments. And, in the meantime, it makes the ticking time-bomb worse. It is a sweetie, handed out to make people feel better: Hollande will give you a sweetie today, but some future government will need to take it back tomorrow twofold.

What is most disappointing for the left about Hollande, then, is that he seems much less the avant-guardiste of a new paradigm for the left, than a throwback to old, ostrich-like ways of the 1970s. It fits, too, because France itself has traditionally been the last big country in the west to accept realities such as flexible labour markets and the death of trade protectionism, as global business moves east.

The danger for Hollande, in short, is that he could end up like Spain's “Crisis? What crisis?” Zapatero, someone many on the left also had high hopes for, and whose career ended in ignominy as he was ultimately forced to take back all the sweeties. Miliband was politically astute in taking advantage of the apparent lack of connection between Hollande and Cameron, and right in going to Paris to make common cause with practically the only socialist premier left. But that, perhaps, should be as far as it goes.

Rob Marchant is an activist and former Labour Party manager who blogs at The Centre Left

French President François Hollande welcomes Labour leader Ed Miliband before a meeting at the Elysée Palace in Paris. Photograph: Getty Images.
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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.