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The Tories’ facile metaphors mask a frightening lack of insight

Osborne and Cameron have no way to express the global challenges they face without sounding as if th

Pity George Osborne at the helm of the British economy, adrift in a sea of foreign economic troubles. To the east, the leaders of eurozone countries fight for the survival of their flagship project. It took a last-minute bailout of Greece on 21 July to assuage fears that the country's
insolvency would spread to other heavily indebted nations and sink the single currency. To the west, Barack Obama is locked in hand-to-hand combat with Republicans over the terms on which Congress might grant the government permission to borrow more money. Failure to reach an agreement risks a US debt default and panic in the markets.

Ministers are fond of maritime metaphors about the economy. The Justice Secretary, Kenneth Clarke, recently described the European and US crises as a pair of icebergs, between which the UK economy must sail. For months, Osborne has been warning that our recovery will be "choppy". When, on 26 July, the Office for National Statistics announced that gross domestic product grew by just 0.2 per cent in the second quarter of 2011, the Chancellor defended his strategy by insisting that austerity had made the UK "a safe harbour in a storm". The implication is that bond traders, reassured by the government's unbending discipline, will not question Britain's creditworthiness.

Made in Britain

You don't have to travel far from Osborne's office to find sceptical responses to the Chancellor's view. You don't even have to leave the Treasury. "That's a pretty lame argument," was the verdict of one senior mandarin. Without growth, the government risks falling short of its revenue and deficit-reduction targets. Markets would then be unforgiving. Austerity was supposed to be the means to an end - restoring confidence as a spur to growth. It isn't working. There isn't much point in securing a harbour without any ships in it.

The Chancellor's misguided metaphor signals a deeper failure of imagination, dating back to the onset of the financial crisis. Now that he is responsible for the economy, Osborne is keen to place Britain's predicament in the wider context of global financial instability. This perspective is newly acquired.

The global economic storm has been raging for nearly four years. For the first two of them, Osborne, as shadow chancellor, played down the international scale of the crisis. Tory election prospects depended on heaping as much blame as possible on Gordon Brown. Yes, there was an international crisis, Osborne conceded, but Labour's reckless spending had left the UK defenceless. The worst of the recession, he claimed, was "made in Britain". Labour deserved some of that scorn but not all. Brown's reputation for sound judgement expired with the hubristic claim to have abolished boom and bust. Yet the relentless focus on domestic politics stopped the Tories from developing a coherent account of what lay behind the financial meltdown. It is an omission that is making the Chancellor's job much harder today.

The credit crunch was, above all, a crisis in globalisation - the deep economic integration of market economies that accelerated exponentially after the end of the cold war. A defining feature of that process was the erosion of borders to facilitate the swift movement of goods, money and people. Power drained away from national governments, with their jurisdictions quaintly demarcated on old-fangled maps, towards global capital markets and multinational corporations.

The City of London was the hub of this globalised world order and host to some of its most reckless financial institutions. Britain became, in the words of the Business Secretary, Vince Cable, "a large offshore banking centre with a medium-sized country attached to it". That made the UK particularly vulnerable .

It is not, therefore, surprising that we experienced a particularly deep recession, followed by a feeble recovery. It is true, as the Conservatives claim, that more fiscal discipline during the boom might have cushioned the blow.

A Budget surplus would have been nice but it would not have changed the underlying reality that Britain was the most diligent disciple of an economic doctrine - ultra-liberal, free-market capitalism - that failed. Osborne and the Prime Minister, David Cameron, seem never fully to have grasped the implications of that failure. Instead, they constructed a morality tale about Labour profligacy causing both the deficit and the national debt. The two items are routinely and duplicitously conflated in the much-abused homily of the maxed-out national credit card. As a parable of domestic economics, it is neat. As an intellectual response to a global crisis, it is dangerously facile.

Fiscal masochism

Manifestly, Osborne's strategy is not going according to plan. Yet to admit even the possibility of an alternative would be to concede that his particular brand of fiscal masochism was a political choice all along and not, as advertised, a diktat from the bond market.

To avoid any discussion of a plan B, ministers privately talk up the flexibility of plan A. The headline ambition is to eliminate the structural deficit within four years but the Budget leaves room for manoeuvre. "If you read the small print," says one member of the cabinet, "it is really five years."

In political terms, the distinction is hardly relevant. The public has accepted austerity and, as the Tories never tire of pointing out, Labour fought the election offering cuts, too. Besides, the government's promotion of Osborne's deficit-reduction timetable as the only legitimate benchmark of credibility has become a self-fulfilling prophecy. Financial markets might have accepted a more flexible approach last May. Now, they are more likely to punish a fiscal wiggle as a failure of nerve.

Osborne and Cameron vigorously pushed a narrow domestic view of Britain's economic problems to serve the demands of last year's election campaign. Now, they are trapped in that parochial story. They have no way to express the global challenges they face without sounding as if they are making excuses for their failed policies - much as they accused Brown of doing. Without an adequate intellectual response to the underlying causes of the crisis, Britain's government floats rudderless through the storm.

Rafael Behr is chief political commentator of the New Statesman

Rafael Behr is political columnist at the Guardian and former political editor of the New Statesman

This article first appeared in the 01 August 2011 issue of the New Statesman, The rise of the far right

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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.