Leader: The battle for London will define British politics

Until recently, it was hard to find anyone who didn't believe that Boris Johnson would win a second term as Mayor of London. Even senior Labour figures privately concluded that Ken Livingstone was facing defeat. But this consensus was always unwarranted. London, where Labour outpolled the Conservatives at the last general election, continues to lean left and being the incumbent is likely to harm Mr Johnson at least as much as it helps him. So the recent polls that gave Mr Livingstone a narrow lead over his rival should have come as no surprise. The air of inevitability around Mr Johnson's candidacy was always illusory.

In their respective exclusive interviews with our associate editor, Jemima Khan, starting on page 22 (and our latest scoop), both men are keen to avoid the appearance of complacency. Mr Livingstone, who fatally underestimated Mr Johnson in 2008, concedes that his Conservative opponent has "real ability, real intelligence", while Mr Johnson concedes that he appears out of touch to voters and that his description of his £250,000-a-year Daily Telegraph salary as "chicken feed" was "very stupid". In these austere times, he can no longer afford such flippancy.

The last mayoral election took place at a time when it would have seemed unthinkable for bankers to lose their knighthoods or their bonuses. One indication of how much has changed since then was that Mr Johnson, hitherto a redoubtable defender of the City, felt compelled to join the criticism of the £1m bonus of the Royal Bank of Scotland chief executive, Stephen Hester, branding it "absolutely bewildering". Voters who thought little of such extravagant rewards when their own pay was rising are no longer so forgiving.

Since the crash, Mr Livingstone has revived some of the old-left rhetoric that made him equally celebrated and loathed as head of the Greater London Council in the 1980s. But his stance on the City remains nuanced. Unlike some on the left, he acknowledges: "The Chancellor has to make a decision about what's the most you can squeeze out of these people before they bugger off." To the charge that he was too close
to the City during his time in office, he replies: "Well, I didn't have any powers to be tougher on bankers - I was the mayor of London." Yet it was Mr Livingstone who lobbied against Alistair Darling's plan to impose a £30,000 levy on non-domiciled foreigners. Like Gordon Brown, he viewed the City as a cash cow to fund social democratic objectives.

But the Labour candidate has learned important lessons since his defeat in 2008. After struggling to win support in outer London last time, he has targeted voters in this area with his impressive "fairer fares" campaign, a local version of the "squeezed middle" strategy pursued by Ed Miliband
at a national level. His pledge to freeze or cut executive pay at City Hall will also resonate at a time when real incomes are falling and London unemployment is 9.9 per cent, well above the national average of 8.4 per cent.

Both Mr Johnson and Mr Livingstone are mavericks who relish disagreement with their national parties. But David Cameron and Mr Miliband have every interest in seeing their respective candidates triumph. Victory for Mr Johnson would be a grave blow to Mr Miliband, who has already seen his party lose heavily in Scotland and struggle to open a sustained poll lead over the Conservatives. Defeat for Mr Johnson would be no less problematic for Mr Cameron, whose failed economic policies would be held partly responsible and whose own electoral prospects would be thrown into doubt. As for Mr Livingstone, a third remarkable comeback would confirm his status as the most successful left-wing politician of his generation.

This article first appeared in the 13 February 2012 issue of the New Statesman, Boris vs Ken

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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.