The Treasury select committee is deeply unimpressed by Osborne's Help To Buy scheme

The plan to help first-time buyers is "very much a work in progress", say Andrew Tyrie and colleagues.

For connoisseurs of polite eviscerations, parliamentary select committees are a joy. From Tom Watson grilling the Murdochs to Michael Gove being asked if his special advisers had really described his junior minister as a "lazy incompetent narcissist", they can feature some very unpolitical plain speaking.

Under Conservative MP Andrew Tyrie, the Treasury select committee has often been a little more independent-minded than the government would like. Its new report into the effects of the Budget looks at the flagship "Help to Buy" scheme, and is a masterpiece of quiet denunciation.

Here's how the Treasury describes the initiative on its website:

Help to Buy is made up of two schemes – “equity loan” where the Government will loan you up to 20% of the value of your new build home and “mortgage guarantee” where lenders will be incentivised to make more mortgages available for people with small deposits.

The Treasury Committee has spotted a number of problems with this idea, and helpfully summarised them alongside Tyrie's thoughts, next to its full report. It describes the scheme as "very much work in progress. It may have a number of unintended consequences."

The first problem is with the structure of the scheme itself. The report notes:

It is by no means clear that a scheme, whose primary outcome may be to support house prices, will ultimately be in the interests of first time buyers. This is the group the Government says it wants to help.

. . .

The lack of clarity over whether the mortgage guarantee scheme will be open to those wishing to purchase a second home is concerning on two grounds. First, it is a reflection of the need to think schemes through carefully before announcing them. Second, whilst the Committee is aware of the complexity which may come with an exclusion, we struggle to see the rationale for the taxpayer to stand behind loans for people wishing to own a second property, especially given that the Chancellor has repeatedly stated that the scheme is primarily designed to help people onto the property ladder as well as those who wish to move property.

The issue of second homes has dogged the policy since the start, with government ministers offering differing opinions on whether it would cover them. The sentence I've bolded is one of several waspish reflections on the fundamental soundness of the plan.

Here's the second stand-out section:

The mortgage guarantee scheme also makes the Government an active player in the mortgage market. The Committee is concerned that the Treasury now has a financial interest in maintaining house prices to limit losses to the taxpayer.

Of course, there are already many reasons why a government would want to maintain house prices - it is not popular politics to plunge voters into negative equity, or make home-owners feel that an asset on which they felt they could rely has fallen in value. But given that high prices (driven by lack of supply in popular areas) are one of the factors locking first-time buyers out of the market, such a scheme places the Treasury in a very peculiar position.

At the Guardian, Nils Pratley analyses the report and notes:

The real problem in the housing market is the lack of new homes. To attempt to stimulate more building by subsidising mortgages and forcing up house prices is a bizarrely roundabout approach. It is long-term, at best. "If the government's priority was housing supply, its housing measures ought to have concentrated there," says the committee. Quite.

A pigeon on a rooftop. Photo: Getty

Helen Lewis is deputy editor of the New Statesman. She has presented BBC Radio 4’s Week in Westminster and is a regular panellist on BBC1’s Sunday Politics.

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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.