EU-US free trade talks show why Britain is better off in

Few can seriously claim that UK on its own would have as much clout in trade negotiations as the whole of the EU.

Like it or not, David Cameron had a good win at the EU budget summit last week. After over 24 hours of caffeine-powered talks he got what he came for - a real terms cut in EU spending. That said, it is easy to overplay Cameron's role in the marathon talks. Germany's Angela Merkel was, as ever, the real dealmaker.

In any case, as Will Straw wrote last Friday, the budget deal is hardly something to celebrate. The budget headings that suffered the biggest cuts were "Global Europe" - which includes development spending - and investment in infrastructure projects. In contrast, despite being cut by 11 per cent, spending on the Common Agricultural Policy - possibly the worst and most wasteful of all EU policies - remains the largest single area of spending.

But while 99 per cent of the summit media coverage was about rehearsing centuries-old cliches about European diplomacy - in last week's case, Britain screwed the French by making a deal with the Germans - the importance of the EU budget was actually pretty low. In fact, while over 24 hours were spent haggling over how Europe would spend just over €900bn of its own money, leaders spent a few minutes and several pages of the summit communique talking about something of far greater significance to the EU's future.

The importance of Barack Obama's launch of formal negotiations aimed at agreeing the world's biggest ever bilateral trade deal during his State of the Union speech to Congress yesterday, dwarves the endless debates in Brussels on rebates, "own resources", and the difference in funding for Pillars 1 and 2.

It hasn't happened overnight. Since autumn 2011, diplomats have been working behind the scenes on preparing the ground for a EU/US trade talks. Full negotiations on a deal looking not just on the elimination of tariff barriers but also on harmonising regulatory and technical standards for products could generate 2 per cent of GDP on its own. EU officials think that, by itself, a US trade deal could translate into €275bn per year for the European economy and two million new jobs.

The EU - as both its supporters and critics would agree - is not just about the single market, but its status as the world's largest market is a valuable and, so far, relatively under-used commodity. At the moment, just four of the EU's 29 trade deals are with countries from the G20, and those four are with South Korea, Mexico, South Africa and Turkey. But the EU is now devoting increasing amounts of political capital to trade. An FTA was agreed with Singapore in December while a deal with Canada is expected to be completed imminently. Negotiations with Japan are expected to be launched in Tokyo in April, meaning that the EU will spend the next year brokering trade deals with the two largest world economies. In contrast to the EU's budget talks, there's nothing inward looking about that.

It is also a welcome sign that leaders are recognising that trade is the single most effective alternative to austerity. The collapse of the Doha round of WTO trade talks in 2005 followed by the financial crisis did real damage to world trade and to the European economy. One of the little-noticed developments in economic policy in recent years has been the glut of protectionist measures. The World Trade Organisation stated earlier this year that only 18 per cent of the trade restricting measures adopted by G20 countries since 2008 have been scrapped, amounting to a total loss of 3 per cent of world trade - equivalent to some €350bn.

But while the drive towards trade marks a decisive shift in priorities by the EU, it is also hugely significant to the debate on Britain's continued EU membership and to the Conservative Party's attitude to Europe.

One of the common lines of attack from the 'better off out' brigade is that, shorn of its EU shackles, Britain would be able to go around agreeing its own free trade deals. In response, one of the most convincing argument in favour of Britain being at the heart of Europe is that together we're stronger. In the EU we are one of the most powerful players in a bloc of 27 countries and 500 million people. Outside, we are, at best, a medium-sized power. When it comes to dealing with the likes of the US and Japan, few can seriously claim that Britain on its own would have as much negotiating clout as the whole of Europe.

Besides, an EU pursuing a free trade agenda should be like manna from heaven for most moderate Tories. It should also pacify those who grumble that the EU should be about trade, not political union. At the very least, if the EU continues the shift towards using its muscle to drive international trade deals it will becoming increasingly difficult for Conservative eurosceptics to maintain that we are better off out.

A couple of days before last week's summit, the Europe minister, David Lidington, told reporters that, come 2017, he and David Cameron wanted to be "campaigning with enthusiasm for a 'yes' vote". On his wish list, alongside less EU regulation and a liberalisation of the services sector, was the "fantastic prize" of a transatlantic trade deal. In Lidington's words, failing to go for it would be "betraying future generations". Cameron himself said today that an EU/US agreement would "create jobs on both sides of the Atlantic and make our countries more prosperous." It looks as though his wish may yet be granted.

It goes without saying that a transatlantic trade agreement is far from a fait accompli. Both sides like to subsidise large parts of their economy - particularly farming - and both will be under pressure from powerful internal lobby groups hoping to strangle the baby before it is born. But the EU and US have, nonetheless, made a bold statement of intent which could eventually lead to a seismic change in the world economy.

Ben Fox is a reporter for EU Observer. He writes in a personal capacity

European Commission President José Manuel Barroso speaks following a summit with US President Barack Obama as European Council President Herman Van Rompuy looks on. Photograph: Getty Images.
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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.