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  1. Politics
12 June 2015

Do the Tories have a plan to soften the blow from welfare cuts?

The adoption of living wage contracts is one way that the party could reduce the damage from cuts to tax credits. 

By George Eaton

The Conservatives have many welfare cuts to make but few ways in which to do so. Before the election, David Cameron vowed to maintain the “triple lock” on the state pension (so that it rises by the rate of inflation, average earnings or 2.5 per cent, whichever is highest) and ruled out cuts to universal pensioner benefits, such as Winter Fuel Payments and free bus passes. Under pressure from Labour, he later added child benefit to the list of no-go areas. If they are to meet their target of cutting welfare by £12bn by 2017-18, this leaves the Tories with £10.5bn of reductions to make from just £125bn of the welfare budget (the protected payments amount to £95bn). The cuts announced so far – a two-year freeze in working-age benefits, the reduction of the benefit cap from £26,000 to £23,000 and the removal of housing benefit from 18-21-year-olds – amount to just £1.5bn. 

When challenged during the campaign on how they would find £12bn of savings, Tory ministers pointed to the £21bn of reductions they made in the last parliament. But this makes the reverse of the point they intend. Any low-hanging fruit have already been plucked: there are no easy cuts left to make. Most Conservatives expect to fall short of the £12bn target they have set themselves (many had assumed that the Lib Dems would force them to do so). But significant savings will still need to be achieved if George Osborne is to meet his aim of eliminating the structural current deficit by 2017-18. 

The most obvious place for the axe to fall is tax credits. They are the largest of the unprotected areas (accounting for £30bn) and have long been regarded by the Tories as emblematic of Labour’s statist meddling. Ahead of Osborne’s emergency Budget on 8 July, the party is reportedly considering saving £5bn by returning tax credits to their 2003/04 levels in real-terms. For 3.7 million low-income families, the IFS estimates, that would mean the loss of £1,400 a year. For the Tories, who have repeatedly framed themselves as the “workers’ party” since the election, this is a political headache. While supporting some welfare cuts, such as a reduced benefit cap, Labour plans to oppose measures that hit the working poor. Further increases in the personal tax allowance (which is due to reach £12,500 by 2020) and low inflation will help to ease some of the pain.  But without a dramatic increase in wages, voters will be left substantially worse off.

An increasing number on the left denounce tax credits as an inefficient subsidy to corporate cheapskates. They call for the introduction of a statutory living wage to relieve the burden on the state. But while some Tories occasionally flirt with the idea, no one expects the party to support a measure that all forecasts suggest would cost jobs. If they are smart, however, the Conservatives will look to the Labour manifesto for inspiration. Before the election, the party proposed the introduction of “make work pay” contracts, which would provide a tax rebate to those companies that sign up to become living wage employers. For every £1 that employers pay to raise salaries to living wage-level, the Treasury saves 49p. Under Labour’s plan, the chunk of this accounted for by higher tax revenues (32p) would have been paid back to firms that signed up, while the Exchequer banked the remainder 

The adoption of this policy would provide the Tories with some political cover as they again cut tax credits. Through acts such as capping payday loan charges and banning exclusive zero-hours contracts, they have shown themselves prepared to make selective interventions. As they face the prospect of damaging their nascent “one nation” brand, here is a chance for them to do so again. 

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