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13 November 2015

George Osborne’s £13bn windfall gives him even more room to limit tax credit cuts

The sale of former Northern Rock mortgages is a timely revenue raiser ahead of the Autumn Statement. 

By George Eaton

George Osborne often gives the impression that the measures he takes are unavoidable if the deficit is to be reduced. After falsely implying that the new national living wage would compensate the losers from tax credit cuts, it this argument that the Chancellor has revived to defend the policy. But as on previous occasions, his room for manoeuvre is far greater than suggested. 

As the Chancellor contemplates how to pay for changes to the cuts in his Autumn Statement on 25 November he has received a fillip in the form of the £13bn sale of former Northern Rock mortgages. The Treasury has announced that the revenue will be “used to pay down the national debt” (which stands at £1.5 trillion or 80.6 per cent of GDP). But the windfall will free up revenue that would have been used to meet his target of a budget surplus by 2019-20 to pay for tax credits. The £4.5bn that would be saved by imposing the cuts in full could already be covered by drawing on the £10bn surplus Osborne is forecast to acheive by the end of the parliament. 

Last month, the Resolution Foundation outlined five ways in which the tax credit reductions could be limited or reversed: increasing the personal tax allowance in line with inflation, rather than accelerating it towards £12,500 (saving £4.9bn by 2020), increasing the basic rate threshold in line with inflation, rather than accelerating it towards £50,000 (saving £1.3bn by 2020), reversing the increase in the inheritance tax threshold and cuts in corporation tax (saving £3.4bn), as Labour has proposed, limiting rises in the state pension after the large increases in the last parliament (saving around £6bn) and returning spending on tax reliefs to 2010 levels by 2020, thereby reducing the UK’s current £100bn spend on around 1,000 different reliefs (saving around £10bn).

The extra £13bn in the Treasury’s coffers will make it even harder for Osborne to argue that the tax credit cuts are a matter of necessity, rather than choice. It is a point made by an increasing number of Conservative MPs. Heidi Allen, who used her maiden speech to attack the policy, said this week following the work and pensions select committee’s report: “I know there are no easy answers, but I sense the majority of people in this country would back the Chancellor if he revisited other possible areas of savings – budget surplus levels or Inheritance tax thresholds, for example. We talk so often about ‘all being in this together’ – now is the time to put that mantra into action.”

Osborne is certain to limit the cuts in some form, as he made clear following the government’s House of Lords defeat. The question is how. After reports that Universal Credit could be cut to raise revenue, allies of Iain Duncan Smith have briefed that he is prepared to resign. Whatever path Osborne takes, he will not want his reversal to be the story of the day. Just as the living wage announcement was designed to camouflage the tax credit cuts, so the Chancellor will surely seek to create a diversion this time.  

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