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26 October 2015

House of Lords defeats the government over tax credit cuts

Peers vote to block cuts unless the Tories offer full compensation to the low-paid for at least three years. 

By George Eaton

In a dramatic assertion of its authority, the House of Lords has defeated the Conservatives over the planned tax credit cuts. Peers voted in favour of a Labour motion, which demanded full compensation for the low-paid for at least three years, by 289 to 272. An earlier motion, delaying the cuts until the government responds to the Institute For Fiscal Studies’ assessment, was also approved by 307 to 277. The IFS warned that the cuts would cost three million families an average of £1,000 a year even after taking into account the new “national living wage” and planned increases in the personal tax allowance. Under the Tories’ plan, the earnings level at which tax credits start to be withdrawn would be reduced from £6,420 to £3,850 from next April.

The government avoided complete defeat – the Liberal Democrats’ “fatal motion” was rejected by 310 to 99 – but this is still a remarkable reversal. Peers overrode the constitutional convention that the Lords does not oppose the government on financial matters on the basis that the tax credit cuts had been introduced as a statutory instrument, rather than as primary legislation (meaning they received less Commons scrutiny). But only five times over the last century has the Lords rejected statutory instruments and never over a fiscal measure.

The failure of the Tories to include the cuts in their manifesto, and their refusal to offer any compensation to the low-paid, led peers to conclude that it was both legitimate and necessary to defeat the government. Briefings suggesting that David Cameron could respond by curtailing the Lords’ powers, or by flooding the upper chamber with new Conservative members (to give the Tories a majority), only hardened their resolve. 

The result is the greatest political reversal that Osborne, the favourite to become his party’s next leader, has suffered since his “omnishambles” Budget. He must now decide whether to accept peers’ demands (eroding some of the forecast savings of £4.4bn), or to reintroduce the tax credit cuts as primary legislation, rather than as a statutory instrument. Peers concede that it would be unconstitutional for them to block the former. But this would consume significant government time, with no guarantee of victory. 

It is now certain that Osborne will have to make some concessions – the only question is how great they will be (he will respond tonight and will face John McDonnell for the first time at Treasury questions tomorrow). But if he avoids staining the Tories’ reputation by inflicting unprecedented cuts on the working poor, he may yet have cause to thank the Lords. 

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Update: Following the government’s defeat, Osborne has promised in an interview with the BBC that he will make transitional arrangements to “help” tax credit claimants, with full details to be announced in the Autumn Statement on 25 November. “I said I would listen and that is precisely what I will do,” he commented. But this is a major concession by the government, which only earlier today was insisting, in the words of No.10, that “the policy is the policy, it is not going to change”.