Will George Osborne soften the tax credit cuts for low-earners?

Labour MP Frank Field offers the Chancellor a partial escape route. 

NS

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The Conservatives are the real "workers' party". That is the message that will be delivered repeatedly at the party's conference in Manchester. To this audacious rebranding, there is no more awkward rejoinder than the coming cuts to tax credits. The new "living wage", which will reach £9 by 2020, will not compensate for the losses that low and middle-income families will endure. As the IFS has calculated, three million households will be £1,000 a year worse off. When MPs recently voted in favour of the cuts, there was a small but significant Tory rebellion (former leadership candidate David Davis and Stephen McPartland voted against). It is the loss of income that low-paid workers (the "strivers" in Conservative parlance) will suffer that they object to. 

Now, Frank Field, the chair of the work and pensions select committee, and one of the Labour MPs most respected by the Tories, has offered George Osborne a partial escape route. In a letter to the Chancellor, the former social security minister argues that he should protect the poorest by raising the withdrawal rate for those earning above the new minimum wage. At present, the planned increase in the taper rate from 41 per cent to 48 per cent and the reduction in the earnings threshold from £6,420 to £3,850 will result in 3.2 million families losing an average of £1,350 a year. 

Field writes: "As you will know I welcome wholeheartedly the introduction of the National Living Wage. But its potentially revolutionary impact will be extinguished next year by these cuts to tax credits. Might I therefore ask please whether you would consider introducing a mitigation policy, at nil cost to the Treasury, to protect the lowest paid while the National Living Wage is phased in?

"There is one cost neutral policy in particular which could protect National Living Wage-earners: a secondary earnings threshold paid for by a steeper withdrawal rate for those earning above this new minimum rate.

"This option would retain the existing £6,420 income threshold but introduce a second gross income of £13,100, the equivalent of working 35 hours a week on the National Living Wage. For gross earnings between £6,420 and £13,100, the taper rate would be kept at 41 per cent. The lowest paid working families, therefore, would experience no reduction in tax credit income compared with the current system. To keep the policy cost neutral, gross earnings above £13,100 would need to be tapered at 65 per cent.

"Might this be something you are willing to consider for the Autumn Statement?"

It might indeed be something Osborne is willing to consider. The Sun reports that Boris Johnson, the Chancellor's chief rival for the Conservative leadership, has been studying the proposal and has warned him of "political disaster" if the lowest-paid are not protected. The Mayor of London, frustrated by Osborne's deft appropriation of the "living wage" he championed, is looking for new means of differentation. Past form suggests that Osborne may well give himself some protective cover when he delivers his joint Spending Review and Autumn Statement on 25 November. 

George Eaton is assistant editor of the New Statesman.