Brown wows us with prudence

I am not a great fan of new Labour's rhetoric. Too often the incremental is proclaimed as revolutionary, the cautiously pragmatic as deeply principled. Even so I have become an admirer of the most mocked of all the government's slogans. To my own alarm, I even deployed the phrase myself the other day. Let's all stand up and give a cheer to "Prudence With a Purpose".

For reasons I will not go into now, I watched Gordon Brown's interview on GMTV's Sunday programme last weekend sitting on a sofa in the company of a former Tory MP. In the interview, extensively reported since, the Chancellor took a stern approach to public spending. As we watched, the admiring Conservative said to me, quite seriously and without a hint of mischief: "I wish we had him on our side. Indeed, I wish he had been our chancellor in the 1980s. He's Nigel Lawson without the reckless streak."

My early-morning conversation had echoes of an exchange with a member of the shadow cabinet. The day after the Tory front bench had gathered for one of their strategic "away days" recently, I was told by one of them that William "was very much in control . . . we are going to get the government on their failure to meet their promises . . . that is their Achilles heel . . . " Then he paused, becoming less exuberant. "The economy is our bloody problem. Are we going to get the credit for the recovery?" he asked nervously. He already knew the answer.

Consider now a chat I had with a senior Liberal Democrat (someone who was not on a sofa with me early on Sunday morning). He told me: "Our internal polling shows that voters see improvements in all the public services since the election except transport. We are going to make complete idiots of ourselves if we call for tax increases when people are already seeing improvements in services and when Brown will be able to spend more as well as cut taxes."

In other words, the opposition parties are in disarray over the issue that decides general elections, the economy in general and "tax-and-spend" in particular. This is quite an achievement for a Labour government in mid-term.

By spending carefully and demanding reforms in the public sector to go with the money, Blair and Brown have become masters of the debate over "tax-and-spend". How the Tories used to rub their hands with justified glee when those words "tax-and-spend" were mentioned. The Lib Dems, too, gained distinctive credit for their proposed "one pence on income tax" policy (although polls of floating voters showed that most of them assumed they were being asked to pay, literally, a penny more for miraculous improvements in schools and hospitals). Now a Labour chancellor holds the aces.

Some will argue that Brown can play such a politically unique hand because he is not really a Labour chancellor at all. But part of this elusive government's strength is that, while there are Thatcherite echoes here and there, the objectives remain explicitly different from what went before. It was over this point that I sloganised with my Tory friend on the sofa. I suggested to him that, while Brown had learnt lessons from the Lawson boom and indeed from the experience of the last Labour government, he was being prudent for a specific purpose.

Not that I have ever met anyone who is prudent without a purpose. No one has ever come up to me and said: "I am being careful for the hell of it." But whenever I have met Brown, since taking up this job, he has always berated me along these lines: "The New Statesman should write more about poverty and the underclass in Britain." I have wanted to talk about the euro, relations with Blair and his leadership ambitions. He has wanted to talk about poverty. Part of Blair and Brown's purpose is to attack the level of poverty. In order to attack it more effectively they seek economic stability. Nor is this presentational waffle from Brown and others, as those who are obsessed with "spin" probably think.

I was struck by the clarity of Brown's objectives soon after the election, at a time when the rest of the government seemed in total disarray over welfare reform. Early in 1998, when Harriet Harman was fighting Frank Field and welfare-reform cabinet committees proliferated, Brown outlined to me the three aims: encouraging people to work, making work pay and increasing the payments to those "incapable" of work. Since then there has been a cascade of policies relating to these objectives. None of them could be described as "revolutionary", but they do "make a difference"- to borrow a more realistic phrase from a wildly varying rhetorical repertoire.

Some of Labour's traditional supporters have noticed little difference, however. There are all kinds of reasons for the discontent, which have been explored at length ever since Peter Hain told me that the government was being "gratuitously offensive" to its core vote. Blair has shown he recognises that there is a problem. In his speech to the TUC, most of which he wrote himself on the day, Blair warned repeatedly that not voting for Labour would only help the Conservatives. Such a passive protest would not, he suggested, produce a more left-wing Labour government.

The same message will be given next week, along with a list of policies and an outline of an economic situation that other Labour governments could only dream about. Even so, amid the upbeat mood in Bournemouth, one question should give government strategists some pause for further thought. If I had been sitting on a sofa early on Sunday morning with a Labour activist in Bootle, watching the Gordon Brown interview, would he or she have enthused as much as my friend from the Tory party?

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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.