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The challenges facing Mark Carney at the Bank of England

The new Bank of England governor doesn’t start until July but he has some important decisions to make before then.

This is an interesting week or so for us MPC watchers; the committee is meeting on Thursday to make its latest policy decision. There is a slight possibility that it will cut rates to 0.25% but no chance at all that it will raise them. It is possible but unlikely it will do more QE.

Next week the Bank of England will release the latest in its long line of overly optimistic forecasts in its Inflation Report. Of particular concern is that their new forecasting model, Compass, apparently doesn't work. I gather that the staff are simply writing the numbers in, which, if true, needs explanation. The Bank has refused to release details of how Compass works and until they do speculation such as this will run rife.    

Thankfully, there is someone around the corner who is likely to wield a big broom and sweep clean. There is a lot of work for Mark “Capable” Carney to do.

On the same morning as the MPC’s decision is released, Carney – who becomes the Bank’s new governor in the summer – will face his first grilling by the Treasury select committee. The Canadian was the best person available to succeed Mervyn King, but he is likely to face close questioning from the committee and the press given that he was a surprise choice. Carney and his wife were rather taken aback, apparently, when the British media showed up on their doorstep asking for comment after his appointment was announced. One journalist called me from outside Carney’s house to say his paper was in the market for dirt on him, but hadn’t found much other than a reputation for being rather grumpy. I am sure he is squeaky clean and the government has done due diligence. The hearing should be great viewing; I just hope he doesn’t lose his cool. Welcome to prime time.

Carney doesn’t start until July but he has some important personnel decisions to make before then. In particular, two of the three most hawkish members of the MPC are up for renewal in May and July. They should be pink-slipped. Even George Osborne might take my advice on this one as he really doesn’t need monetary tightening any time soon. The underqualified chief economist, Spencer Dale, and the external member Martin Weale should both be put out to pasture.

Carney has made it clear that he is hoping to be able to use “forward guidance”, which means a promise to keep rates lower for longer. He has also called for increased flexibility in monetary policy, with a greater emphasis on growth rather than inflation, along with morenon-conventional quantitative easing which would involve buying assets other than gilts. All of these ideas are sensible, but change at the Bank of England was never going to be easy. King, the cruel tyrant, has already pushed back: in his final speech, he shockingly went after Carney. “Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. So a long-run target of 2 per cent inflation should be an essential part of our macroeconomic framework.” Typical.

There are grounds for letting Carney earn his money without the monetary policy committee getting in the way. There are two possibilities, either the MPC is a rubber stamp or it stands in the way of change – so under either scenario it looks irrelevant. I bet Carney is already thinking along the same lines. I can’t wait.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 11 February 2013 issue of the New Statesman, Assange Alone

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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.