Leader: MPs should be paid more but the whole system needs urgent reform

There is a sense of widespread disenfranchisement from a political system that people feel is corrupt and rigged against them.

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The suggestion that MPs’ pay should be increased, during this protracted and bitter period of austerity, seems like an idea drawn from the Louis XVI school of public relations. Average wages are not forecast to return to their pre-recession level until 2023 and, after a two-year pay freeze, public-sector salary rises have been capped at 1 per cent until 2016. If any group is to be exempt from such privation, how many will agree it should be MPs?

After the expenses scandal of 2009, MPs ceded control over their pay to an arm’s-length regulator, the Independent Parliamentary Standards Authority (Ipsa). David Cameron declared at the time: “We say that from now and into the future, MPs should not vote on our pay, our expenses, our pensions, our terms of service . . . Isn’t that an essential part of restoring faith in parliament, in politics, in this House of Commons, that all of us care about?” What he did not anticipate was that Ipsa, unbeholden to public opinion, would suggest that MPs’ pay should rise, not fall. When the body publishes its recommendations later this month, it is expected to propose a 13 per cent increase in MPs’ basic salaries from their current level of £66,396 to £75,000. MPs also have generous pension allowances.

For fear of incurring the wrath of voters and the tabloid media, all three of the main party leaders have distanced themselves from the report. Mr Cameron has argued that the “cost of politics” must be reduced, Ed Miliband has suggested that any increase in pay should be pegged at 1 per cent and Nick Clegg has described, with his usual verbal elegance, the prospect of a rise as “potty”. Some MPs have even suggested that parliament should strip Ipsa of its responsibilities in this area. Yet, privately, most recognise the case for reform. A survey of 100 MPs conducted by YouGov on Ipsa’s behalf found that 69 per cent thought they were underpaid, with an average salary of £86,250 proposed.

Any assessment of MPs’ pay must begin by acknowledging that, by historical standards, they are not underpaid and that they already earn vastly more than most of those they represent. In 1979, MPs were paid £9,450, the equivalent of £40,490 in real terms. Their pay has since risen by more than 50 per cent, compared to an average increase of 37 per cent. The median full-time salary in the UK is £26,312, putting MPs comfortably in the top 5 per cent of earners.

Yet if parliamentarians have less cause for complaint than some suggest, the case for an increase in their pay remains a compelling one. The average MP now works 69 hours a week, excluding travel, with much time spent on constituency casework. British members are paid significantly less than their counterparts in Japan (£165,945), the United States (£108,032), Australia (£120,875), Italy (£112,898) and Canada (£99,322) and less than the average GP (£88,920) and far less than the typical BBC executive.

Should MPs’ salaries remain frozen at their current level, the result will be an even narrower political system, the preserve of the trust-fund class, the wealthy and the entitled. It was in an attempt to avert this fate that David Lloyd George introduced an annual stipend of £400 for MPs in 1911, describing it is an allowance for those “who cannot be here because their means do not allow it”.

Today, for those without inherited wealth or lucrative business interests, the obstacles to becoming an MP are becoming more formidable. As the former Labour general secretary Peter Watt recently wrote of parliamentary selections, “If you can’t afford to take a couple of months off work, pay for accommodation and travel, abandon your family and pay for your own materials you are screwed.” Add to this the estimated £10,000 cost of running for parliament and higher pay begins to look like nothing less than adequate compensation for what is or should be a hugely demanding job. It was this consideration that led Commons officials to encourage MPs to treat their expenses as a de facto second salary, creating the conditions for the scandal uncovered in 2009.

If an increase in pay is to be sold to the public – and it will have to be at some point – it will only be acceptable as part of a wider set of measures to improve democracy and accountability. In return for an increased basic salary, MPs should relinquish any significant outside interests and devote their full attention to legislation and to their constituents (many of whom are in desperate need of it). The bloated House of Lords, whose 760 members are able to claim a tax-free daily allowance of £300 for “clocking in”, must finally be reformed and replaced with an elected senate. All 92 hereditary peers should be abolished. And all parties must give greater thought to how to enable more working-class candidates to stand for parliament, including the possibility of a public allowance for those without the necessary means.

Our politics are debased and our culture is hysterical. The public is no longer merely sceptical of MPs’ motives; it is cynical about them. And fewer and fewer people wish to become members of a political party. There is a sense of widespread disenfranchisement from a political system that people feel is corrupt and rigged against them.

If we are to have a democracy that is truly worthy of the name, it is time to recognise that we will need to pay for it.

The Houses of Parliament. Photograph: Getty Images

This article first appeared in the 08 July 2013 issue of the New Statesman, The world takes sides

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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.