Duncan’s Economic Blog

Osborne: Hitting Low Earners

Posted in Uncategorized by duncanseconomicblog on December 3, 2009

It appears that George Osborne has messed up again.

Yet another of his ‘brave and bold’ pledges to reduce the budget deficit  seems to be unravelling (‘brave and bold’ pledges that amount to a grand total of £7bn a year in the context of a £175bn deficit). Much like his claims on the savings from pension reform – which turned out to be £3bn wide of the mark.

As the FT Westminster blog reported at the time of his conference speech, Osborne claimed he could save £400mn a year by cutting tax credits to ‘high earners’:

Withdraw tax credits from “high earners”:  If Osborne reaches No 11, any household earning more than £50,000 should no longer expect the family element of the child tax credit. This is done by reducing the threshold for means testing to £40,000 — so families with incomes of 40-50K will also receive less. This saves around £400m a year. This is a brazen raid on a middle class perk: a household with two teachers would be affected. But the Tories say the maximum loss will be around £10 a week.

It was obvious then that not all of these ‘high earners’ actually earned that much.

More details have emerged today. This goes well beyond ‘high earners’ and the ‘middle class’:

As Left Foot Forward reports today:

“To reduce total annual Tax Credit expenditure by £400 million, it is estimated that the second income threshold would need to be reduced to around £31,000.”

In other words couples earning as little as £16,000 each would lose out.

As Liam Byrne says:

For the Tories to recoup £400 million from tax credits as they’ve pledged, Osborne had claimed he would only remove tax credits from those earning over £50,000. But figures released to Parliament today show that to raise the £400mn Osborne’s credibility depends on, a couple earning as little as £16,000 each would be hit by his tax plans.

These new Treasury figures expose how George Osborne has misled millions of people over the scale of cuts he would make to their tax credits.                                                   
Today we learn that he would hit millions of families on low incomes, while still promising to give £200,000 to the richest estates.                                                             
Yesterday it was prisons, today it’s tax credits. Every day, another of George Osborne’s unfair policies unravels.
It’s not clear whether it’s down to his bad judgement, his inexperience or something more sinister.

I’ve long accepted that George Osborne’s macro-economic views are nonsensical. It would be nice though if he could at least add up properly.

No wonder the city is losing confidence in him.


4 Responses

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  1. Liam Murray said, on December 3, 2009 at 11:02 pm

    I think this echoes some exchanges we had at Hopi’s place a few weeks back. Osborne’s critics are taking the savings he’s claiming and the current structure, rules & thresholds around tax credits and pointing out he’s not quite done his sums properly. In terms of the usual cut & thrust of political point scoring that’s all fair enough of course but his wider point about whether welfare is going where it’s most needed stands unchallenged.

    It’s perfectly possible to alter the tax credit system simply to make sure no household with an income of £50k pa or more gets any benefit whatsoever – and all households below that get exactly what they do at the moment. It might not realise £400m in savings and it might require quite a radical shake up in how TCs are paid but the fundamental point is it can be done.

    • (Layman) Mike said, on December 4, 2009 at 10:39 pm

      As discussed over at Hopi, an abrupt cut at £50k causes a discontinuity, resolved by introducing the means testing at a lower threshold. But this lower threshold ain’t for the discontinuity; it’s to provide the promised savings.
      The point is how little cutting child support saves (in the bigger picture). Osborne acknowledges that cutting support for the upper middle classes (assuming £50k is joint income) won’t save enough and starts at £40k. Others say that the entire middle class needs to be affected (£30k). Either way, (from Duncan’s posts) benefit cutting ain’t gonna save us. There needs to be significant growth.
      Cutting child support to the middle classes is an old idea and gets rejected for fear of alienating the very voters the parties need.
      (I write this with absolutely no knowledge of the subject. I should try fitting some actual numbers to see the real shape of the graphs. So should you.)

  2. gastro george said, on December 4, 2009 at 11:00 pm

    Cutting middle class benefits is mad. All it does is save little, makes the benefit more expensive to administer, adds additional poverty traps and (maybe most important) cuts the stake that the middle classes have in the benefit system.

    Better to have universal benefits and proper taxation.

  3. […] Other green news has been permeating the blogosphere, in the wake of Copenhagen. There’s Phil querying the merits of carbon capture and storage – which has bearing on article I wrote a while ago about the Kingsnorth plant not far from me. Will Straw at Left Foot Forward has an excellent article outlining a hundred reasons why people shouldn’t vote Blue if they want Green policies. Hopi Sen has some good stuff debunking a specific Tory “Green” policy (while Duncan talks about how George Osborne will hurt low earners). […]

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