The Journal of Lynton Charles, Fiduciary Secretary to the Treasury

Thursday We are an hour into the flight home to London, and I am writing this from the relative discomfort of the first-class compartment in a British Airways plane. All around me are either relieved Britons, glad to be safely en route for the certainties of home, or strange, rich Russians. And who knows what they are on their way to do?

Thinking about it, those Romanian beggars who have so exercised the Witchfinder General's department are the least of our problems. Almost by definition, a rich Russian - of whom plenty are on this flight, heading for mansions in Maidenhead and Highgate - is into something dodgy. It's just that he or she steals millions quietly, while these awkward beggars make pennies all too publicly.

In addition to this thought, I find myself with several other important and weighty matters to muse over. Like, did I make a fool of myself in front of the fabulous Petronella after the state banquet? I have no head whatsoever for alcohol, and they would keep making me drink those toasts in vodka (starting with "Our Wives!" and going on to "Beautiful Women!", I bowed out when it began to get anatomical), and Petronella poured me into a car and brought me back to the Mezhdunarodnaya. Where I may or may not have proposed congress to the lovely economics attache. She said nothing about it the next day - so here's hoping.

Then there is the case of Arkady Serafimovich Merkin, the head of Doshformin, the section of Gosprom (the economics ministry) that relates most closely to my duties in the fiduciary field. Arkady, a handsome man in his early fifties, with manicured nails and a Yamamoto suit, was my guide to Russian politics in the Putin era. Here are my notes:

"Is not like your party system," Arkady tells me over the caviar (by which time he is smiling too broadly). "If party name is 'Democratic', it means is run by fascist demagogue. If name is 'National', that is run by army. If name is 'Centre Party', is run from centre. If name is 'Bloc of Rightists', is equivalent of your new Labour Party. OK?"

I thank him. We then go on to discuss his sex life for half an hour, interrupted only by some unscheduled lap-dancing, which - as Arkady points out - is rarely an accompaniment to Treasury functions in the UK. Even if Mr Brown were to have a lap, it is hard to imagine anyone dancing in it.

When the dancer has perfunctorily straddled all of us - save Petronella - for a minute or so (where are you supposed to look?), Arkady gets down to business.

"We have little trade with you in Britain, and you are not important to us. We like your Dickens and your Shakespeare, but weather is better in California and Cyprus. And if you're going to be cold and eat bad food, you might as well be in Germany.

"But . . . " He pauses for effect, and stabs the table with his fish-knife. "But we do need financial aid from international institutions, where you have influence. Otherwise we have trouble meeting our obligations. There is the cost, for instance, of decommissioning old nuclear weapons. At this moment, hundreds are sitting rusting in old silos with mouses eating the command wires. And some of them pointing straight at . . . what part of Gampshire did you say you were from?"

I tell him I will convey his messages, and that's when the toasts start.

So now, on the plane, I think about communism and capitalism. I once quite liked the idea of communism, then realised it was a disaster in Russia. Then I was converted to capitalism. But that's a disaster in Russia, too. Perhaps Russia is just one of those places, like Liverpool, where nothing ever quite goes according to plan. I must share this thought with Peter Kilfoyle.

This article first appeared in the 10 April 2000 issue of the New Statesman, The long war against democracy

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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.