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Leader: Lessons for Labour from an Essex Tory MP

Robert Halfon's call for the reinstatement of the 10p income-tax band could be a winning idea for Miliband.

Rarely in recent history has the Conservatives’ self-image as the natural party of government seemed less appropriate. Unappeased by David Cameron’s promise of a referendum on Britain’s membership of the EU, Tory MPs have taken to plotting and scheming against the Prime Minister even as his poll ratings remain better than those of his party.

The same malcontents went on to vote against same-sex marriage in greater numbers than in favour of it, sabotaging a rare opportunity for Mr Cameron to prove that his party had changed. This is not the party of “modern, compassionate” Conservatism that he promised to build when he was elected leader in 2005.

Faced with the compromises of coalition, Tory MPs remain aggrieved by Mr Cameron’s failure to win a majority against an enfeebled Labour Party in 2010. Yet their belief that he did so because he was insufficiently Conservative is delusional. The party remained untrusted by public-sector workers, by northerners and Scots and, most notably, by ethnic minorities, just 16 per cent of whom voted Conservative.

Yet beyond the party’s revanchist wing there are Conservatives beginning to think hard about how they can avoid a similar failure in 2015. One of them is Robert Halfon, the MP for Harlow, one of the Essex new towns built after the war. Elected in 2010 at the third time of trying (he lost the bellwether constituency by just 97 votes in 2005), Mr Halfon recognises that, in order to win a majority, the Tories must attract more low-income and working-class voters and that to do so the party must focus relentlessly on reducing the cost of living.

His perspective is shaped by the Essex constituency he represents, where most voters earn less than the national median wage and where 30 per cent live in social housing. He led the successful campaign for a freeze in fuel duty and, in an insightful pamphlet, Stop the union-bashing, called for the Conser­vatives to end their hostility towards trade unions, “the very core of the Big Society”, and to offer free party membership to all union members.

In anticipation of the Budget on 20 March, Mr Halfon has made his most audacious proposal yet. The MP is calling for the reinstatement of the 10p income-tax band infamously abolished by Gordon Brown in his valedictory Budget in 2007. After trying and failing to persuade George Osborne not to scrap the 50p top income-tax rate (“At a stroke, it would allow our opponents to re-characterise the Conservatives as being the party of the rich,” he wrote presciently in an article for ConservativeHome in October 2011), Mr Halfon argues that his party must show that it is “not just interested in tax cuts for the rich”.

He would restore the 10p tax band for earnings between the personal allowance, which will rise to £9,440 in April, and £12,000, a measure worth £256 to basic-rate taxpayers. Displaying the kind of political astuteness that Mr Osborne has recently lacked, he has proposed meeting the £6bn-a-year cost of the policy by ring-fencing revenue from the 45p top rate of tax in an explicit act of redistribution. The Treasury, unsurprisingly, is beginning to take an interest.

Mr Halfon is right to seek to reduce the tax burden for low earners. Since the removal of the 10p tax rate, individuals pay a de facto marginal rate of 32 per cent (20 per cent income tax and 12 per cent National Insurance) on all earnings above the personal allowance. This, combined with VAT of 20 per cent, record petrol prices, ever-rising train fares and pension contributions and, for young people, student loan repayments, has squeezed real incomes at a rate unknown at any other point in modern times.

Ed Miliband, to his credit, was quicker to highlight this phenomenon than either his Conservative or Liberal Democrat counterparts. But while speaking encouragingly of how a Labour government could widen payment of the living wage, for instance by making it a condition of public-sector contracts, he has had little to say about reducing the tax burden. True, Labour has proposed a reduction in VAT from 20 per cent back to 17.5 per cent but as a stimulus measure this would, by definition, be temporary. With economic conditions so volatile, Mr Miliband is right not to commit to expensive tax cuts at this stage of the electoral cycle. But he should begin to offer voters some indication of his direction of travel.

In an interview with the New Statesman last year, the Labour leader rightly observed that “people are out of love with an uncontrolled market but they’re certainly not in love with a remote state”. By refusing to countenance tax cuts for low and middle earners (we consider National Insurance to be a form of income tax), Mr Miliband is in danger of reverting to statist type. In the lead-up to an election that will be defined by the issue of living standards, Labour must begin work now on a range of measures to ease the burden on low-income families – and it could do worse than seek to learn from Mr Halfon.

This article first appeared in the 11 February 2013 issue of the New Statesman, Assange Alone

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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.