Class action

Michael Gove needs to find some better advisers fast.

Do you believe in magic? If you give a damn about politics -- and you're reading The Staggers, so it's a fair bet that you do -- then you will probably have spent a lot of time asking, "Yes, but what does this actually mean?" Public services aren't delivered by pixies casting spells, but through a complex set of arrangements that only start in Whitehall. You wouldn't know it, but the public sector was undergoing significant change long before the banking crisis woke the politicos up to the Budget deficit.

What I will try to do here is draw the strands together and define the multidimensional chess game that is UK government. I'm going to bring together the connections between local and national politics, Whitehall civil servants, local officers and business.

It just keeps getting worse for the Education Secretary, and what started out as a little local difficulty may ultimately do for the coalition. Michael Gove started with a difficult wicket, fumbled the delivery and now has the lawyers waiting in the outfield. His error-strewn, multiple lists of cancelled school building projects mask a deeper and more complex row. And his two grovelling apologies, one to parliament and the other to councillors, weren't his first. He had to say sorry to councils after pledging to "set schools free from local authority control". Councils haven't run schools for years, but they are critical to such things as excluded kids and special needs education. Ooops.

To start, let's follow the money. The £55bn Building Schools for the Future programme was delivered by the Partnership for Schools quango to education authorities run by local councils. The aim was to build schools that are specific to local need, with long-term lifespans beyond 30 years.

The school found sponsors and contractors and cleared its bid with the education authority, which sent it on to BSF, which then sent the cash to the school. But Gove has argued that the process was cumbersome and time-consuming, and the procurement process too expensive. He has a point: Skanska spent £5m on its failed bid for contracts with Essex County Council. But bidders don't get compensation.

Labour had sent through a final pre-election tranche of school contracts, and Gove wanted to stop a fresh wave of deals from adding to costs. But he failed to see just how much chaos and anger it would cause -- even among councils on his own side. Figures from the Local Government Association showed that 67 councils have spent at least £160m doing the legally required paperwork for their now-axed bids. Sandwell Metropolitan Borough Council and Nottingham City Council have already signalled that they will mount legal challenges.

Others may follow. Kent County Council -- one of the top-performing Conservative authorities -- is also reviewing its options, as is Wigan. An early cost estimate for legal fees doing the rounds is £100m if every wronged council steps up. And that's before the parents get involved.

Although it's about schools, many of the BSF projects are hubs for regeneration projects that will lever long-term job creation into local economies. That double-dip recession is now a step closer. And the actual government exposure could be as low as £1bn, depending on how you calculate it. Gove's hope to find savings will also be scuppered by the crushing demand for more school places.

Most urban councils have experienced a significantly increased birth rate. Newham Council in east London is predicting that, for the 2012/2013 intake, it will have put in place 32 more reception classes than it had in 2007 -- an extra 3,000 places. Gove could crowbar more kids into existing schools, but that would be political suicide. Added to this, rural Conservative councils are arguing that education funding is unevenly weighted against them. Devon County Council is campaigning for a bigger slice of the pie.

And there is the political pressure on the coalition; the Lib Dems' leader in local government, Cllr Richard Kemp, has described BSF as "the straw that will break the camel's back". Even when the national media row dies down, local papers will have a field day and individual MPs will do what they always do: complain about the disgraceful spending and then lobby to save their own schools. Brass plaque fatigue will also turn grass-roots supporters against the cuts: long-serving councillors getting to hear about the scrapping of the Vera Baggins Wing, named in recognition of their years of sitting in dreary meetings, will bring howls of outrage.

Gove's decisions will hit just in time for local elections next May, and the Conservatives admit privately that they are at an electoral high-water mark. This will add to their losses. Then there are the "unknown knowns" of overspends on the projects he greenlights: the nasty surprises, such as asbestos, that the builders will find when they overhaul a 40-year-old building. Cost overruns are inevitable.

So, what options does he have? He could free up local authorities to find funding on the open money markets. They have an excellent AAA rating and all that would be needed is a small change in the law, but the Treasury isn't keen. He could tell councils that what they cash they can have, but that smashes to pieces his claims of driving localism forward. To be fair, the Education Secretary has halted a programme, which is a world away from a vow never to build another school again.

But there will be losers. And he did not communicate what the alternative would be. He will have to explain why he has decided that individual projects are unviable. That is when the lawyers will step in. Gove needs to find some better advisers, and fast, or listen more carefully to what his departmental officials tell him. When you're in a hole, stop digging.

Chris Smith is a former lobby correspondent.

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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.