Cash in the attic: the City of London. Photograph: Getty Images.
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UK businesses have plenty of cash to spare, and they're spending it on the young

Companies are starting to use their cash balances in at least one useful way, to provide training programmes for able young people as an alternative to university.

Companies are awash with cash. They’ve been hoarding a war chest since the financial crisis hit in 2008. It has achieved ridiculous proportions; in the US and UK corporate bank balances have doubled in size, Japan has recently seen a spike while Europe has also built a buffer, if not to the extent of other regions. However the signs are that companies are beginning to deploy this money – especially in the UK.

There are the obvious things like share buy-backs, and mergers and acquisitions, that you can do with excess corporate money, but more encouragingly companies are beginning to think in a new way about the next generation of people working in their businesses. Increasingly, a new form of sponsorship is emerging. In moves not seen for a generation, companies such as the accountants Deloittes are hiring young people into their businesses as an alternative to going to university. Business is beginning to invest in young people, filling the gap left by universities that offer courses of doubtful relevance at prices that are just too high.

The general public is smart enough to detect the whiff of corporate insincerity in any charm offensive – tokenistic community-based projects will be seen through as box ticking Corporate Responsibility initiatives that offer little lasting relevance. Businesses will only truly “put something back” if given the right incentive to do so and there is nothing like the profit and cost motive to do that especially in the new era of shareholder activism. The Labour Party’s newly announced policy to “tax the bankers” to provide youth training schemes in that respect, once more, misses the mark. It misses the mood of the day, that there is a new dynamic at work that will see companies investing in young people because it makes business sense.

Sadly, the negativity towards business identified in The Trust Deficit: After the Crash by the research group Populus for the legal firm DLA Piper, is reinforced by mainstream economists like David Blanchflower and politicians like Ed Miliband. Writing in The Independent this week Blanchflower indulges himself in yet another populist diatribe which offers little except the tired observation that some people have more money than others and because of the way unemployment in this downturn has hit the non-graduate pay grades, the income gap between them and graduates has increased in the past five years.

What Miliband and Blanchflower both miss is that if pay structures in certain parts of the economy aren’t sustainable or aren’t valued then they won’t last – they will wither and die of their own accord. It does not need a tax – it does not need a law for that to happen. Besides, with the economy picking up, they are starting to sound somewhat behind the evidence. We don’t have an incomes policy and we don’t, thank goodness, have a limit on what any individual can earn in our country and long may that last. Treating the lawful activity of whoever it is in society who earns super-normal money (which in turn feeds the Exchequer) whether that is a footballer, pop star, entertainer, private company director, public company director or, yes I’m going to say it, a “banker” as immoral is an otiose argument which only has currency at the trough of the economic cycle. That moment has passed.

In a capitalist system, like ours, you will always have cycles. Capitalism is, in that sense, inherently unstable and liable to peaks and troughs – Karl Marx appreciated that. This requires the existence of a safety net to catch people when they fall. That is the implicit social contract we are involved in. But in this downswing a new part of the safety net has emerged – one which protects talented young people from the penalty of government education policies. It is one which will see companies deploying their cash reserves, taking on a positive role in shaping the next generation of workers by helping them over barriers to entry into higher earnings via education no matter their background. Getting the administration – and opposition – of the day to cooperate with and praise that idea is much more useful than replaying tired class war ideas that send the wrong messages to our young people about the possibilities of work and what business contributes to society.

Head of Fixed Income and Macro, Old Mutual Global Investors

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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.