PMQs review: Cameron falls into Labour's "bedroom tax" trap

By repeatedly insisting that the "bedroom tax" was not a tax, the Prime Minister gave the phrase new life.

One of Ed Miliband's boldest decisions since becoming Labour leader has been to target the coalition's welfare cuts and today's PMQs saw an all-out assault on the "bedroom tax". For those unfamiliar with the term, it refers to the government's plan to cut housing benefit for those deemed to have more living space than they need, such as a spare bedroom. Social housing tenants with one extra room will lose 14 per cent of their benefit, while those with two or more will lose 25 per cent.  

The government argues that this is another necessary measure to reduce the ballooning housing benefit bill (which is largely due to extortionate rents and substandard wages) but Miliband highlighted the case of a mother with two sons in the army who would lose out while they were away "serving their country". He went on to warn that two-thirds of those affected are disabled (many of whom require an extra room due to their disability) and that it would encourage social housing tenants, "the most vulnerable", to move to the more expensive private sector, wiping out any savings from the policy as the housing benefit bill rises. Miliband also smartly contrasted the Tories' "bedroom tax" with their opposition to a "mansion tax", brandishing a letter from the party to Conservative donors asking them to contribute to a fighting fund against a "homes tax". 

Cameron gave little ground in response, pointing out that there was a £50m fund to deal with "difficullt cases" and bluntly asking why it was fair for social housing tenants to receive money for an extra room when private tenants did not. For a self-described "compassionate Conservative", it was a rather compassionless reply. As Cameron's answers became increasingly ill-tempered, Miliband deftly weaved in a reference to last night's vote on equal marriage: "He shouldn't get so het up. After all, he's got almost half his parliamentary party behind him." Unsurprisingly, the line went down well with both sides of the House. 

The PM's best moment came when he remarked of Miliband: "we know all the things he's against, we are beginning to wonder what on earth he's for?" If Labour is opposed to the "bedroom tax", the "strivers' tax", the "granny tax", the "toddler tax", how would it reduce public spending? Would it introduce a "mansion tax"? Miliband gave the stock reply that "the clue's in the title - Prime Minister's Questions - he's supposed to try and answer them". But this riposte, while acceptable in 2010, is less impressive halfway through the parliament, with Labour MPs increasingly troubled by the perceived lack of policy detail from their leader.

After Miliband had used up his six questions, Labour MPs continued to challenge Cameron over the "bedroom tax" in a well coordinated assault. An increasingly exasperated Cameron repeated that the "bedroom tax" was not a tax but, in doing so, he unwittingly repeated Labour's attack line. Whether the PM likes it or not, when voters hear him refer to the "bedroom tax" that is what they will call it. Across the floor, Miliband and Ed Balls smiled contentedly in response. Their work for the day was done. 

David Cameron leaves 10 Downing Street in London, on February 06, 2013. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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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.