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26 October 2015updated 06 Aug 2021 4:07pm

Why did the cost of tax credits go from £1bn in 1999 to £30bn today?

Spoiler alert: it didn't. 

By Tim Blackwell

Supporters of the government’s cuts to tax credits claim that the cost has increased beyond expectations. Here’s George Osborne in the summer of 2015:“The original Tax Credit system cost £1.1 billion in its first year. This year, that cost has reached £30 billion”

The claim was repeated in the Telegraph a few days ago.

“A system that cost just over £1 billion in its first year ended up costing £30 billion a year.”

A thirty-fold increase in costs would certainly suggest things gone awry. But a thirty-fold increase is hard to reconcile with the government’s own research.

“In most years [1997-2011] spending on working age people and children accounted for between 12 per cent and 13 per cent of Government spending”

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The truth is that Osborne is comparing two very different things.

The history

When Labour came to power in 1997, government provided support for families with children:

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  • via the (at that time) non means-tested child benefit
  • via family credit, a means-tested benefit for working families with children
  • via the married person’s tax allowance, and the additional person’s tax allowance available to unmarried parents
  • via child personal allowances paid as part of income support and income-based jobseeker’s allowance, these being means-tested benefits paid to out-of-work claimants

In addition, a relatively small number of people with disabilities received in-work support via disability working allowance.

The 1999 scheme – the first tax credits

In October 1999 the Labour government introduced two new benefits:

  • working families tax credit, replacing family credit
  • disabled person’s tax credit, replacing disability working allowance

These were essentially a re-badging of family credit and disability working allowance. Structurally very similar, they were substantially more generous than the benefits they replaced:

  • increased amounts could be paid for adults and each dependent child
  • the income figure at which benefit began to be withdrawn was increased
  • the taper rate at which benefit was withdrawn due to rising income was reduced from 70% to 55%
  • child-care support began to approach realistic levels

It’s this 1999 scheme, which covered low-income working families only, to which Osborne refers when he talks about expenditure of £1.1 billion.

What he doesn’t say is that that figure:

  • only covered six months – from October 1999 to March 2000
  • only covered three months of tax credit payments for a typical claimant

The latter applied because family credit was awarded for six months at a time. Claimants were not permitted to end their award early in order to switch to working families tax credit. In October 1999, on average, a family credit claim had three months left to run. By the end of March 2000, former family credit claimants had therefore only enjoyed the increased income from working families tax credit for an average of three months.

Children’s tax credit

In 2000-2001 the government replaced both the married person’s tax allowance , and the additional person’s tax allowance with the short lived children’s tax credit, a tax allowance aimed specifically at parents.

The 2003 scheme – working tax credit and child tax credit

In April 2003 Gordon Brown introduced a new tax credits scheme, structurally very different to anything seen before in the UK.

Child tax credit replaced all of:

  • the per child allowances in family credit; and
  • the child personal allowances in income support and income-based jobseeker’s allowance;and
  • the children’s tax credit – this effectively became the family element of child tax credit which could be paid to claimants earning well over £50,000.

Working tax credit replaced the remaining parts of working families’ tax credit and disabled person’s tax credit. It extended entitlement to some workers who were neither parents nor disadvantaged due to disability.

The personal allowances for children which formed part of income support and income-based jobseeker’s allowance were not immediately removed from existing claims – migration to child tax credit took place over several years, with the cost of child tax credit rising accordingly. Now nearly all state child support other than child benefit is delivered as child tax credit.

The comparison

So £1.1 billion represents the cost of:

  • in-work support only
  • covering a six month introductory period
  • with only three months on average being paid under the new scheme

£30 billion: the full-year bedded-in cost of:

  • in-work support for low income workers and their families
  • support for children in non-working families
  • replicating support previously given to parents as a tax allowance

And of course no adjustment has been made for inflation or changes in the composition and numbers of households.

None of this is to say that tax credits did not become more generous – and undoubtedly the 2003 scheme had many faults. But Osborne’s comparison is neither useful nor fair.