Senior Whitehall figures expect that George Osborne will soften the impact of tax credit cuts, amid fears among Tories that the government is suffering severe damage from the charge that it will penalise low-paid workers.
As a growing number of ministers privately call on the chancellor to change tack, well-placed Whitehall sources say there is a growing expectation that Osborne will act in his autumn statement on 25 November.
The chancellor is playing his cards close to his chest and is giving no indication of any change of course even to ministers and officials who are in regular contact with the Treasury.
Whitehall sources expect that Osborne will make no change to his plan to cut the earnings level at which tax credits start to be withdrawn from £6,420 to £3,850 from next April.
But the sources say they expect he will find ways to relieve the pressure on low-paid workers. Osborne is said to be alert to warnings from ministers and Tory backbenchers who say his attempt to rebrand the Conservatives as the workers’ party is undermined by the finding from the Institute for Fiscal Studies (IFS) that 3m families would lose £1,000 a year.
One option to help the low-paid would be raising the rate at which employees pay national insurance contributions. This is currently levied at a rate of 12% on incomes above £8,000, unlike income tax which is not paid on earnings below £10,600.
Andrew Hood, a research economist at the IFS, said he thought the chancellor could mitigate the impact of the cuts in four ways:
• Taking steps to exempt the lowest earners from paying national insurance.
• Accelerating the raising of the tax-free personal allowance, which is due to increase to £11,000 from April 2016 and to £12,500 by the end of the parliament. Hood said these two policies were expensive and did not target low-paid workers as effectively as tax credits. “The problem that both of those policies have in common is that, in the absence of any change to the rates of income tax or employee national insurance, increasing the thresholds is very expensive for the amount of compensation you get.”
• Making the income threshold at which tax credits start to be withdrawn apply only to new claimants from next April or changing the threshold from £6,420 to £3,850 in increments.
• Changing his path of eliminating the deficit by, for example, delaying his plans to deliver an overall budget surplus. Osborne has already delayed his surplus target by one year, to 2019-20, which delivered him about £4bn. He could delay the target by another year, until 2020-21, and still meet his surplus target by the time of the next general election. The tax credit cuts make up £4.4bn of the chancellor’s £12bn welfare cuts.
Osborne has said his focus is on avoiding a defeat when the House of Lords votes on the cuts on Monday. The government, which had feared that its plans could be derailed by a Labour motion calling for a new scheme to provide transitional protection, received a boost when bishops agreed to table a “motion of regret”. This would allow peers to register their concerns about the cuts without actually stopping them.
It is expected that the chancellor will seek to respond constructively if the upper house backs the bishops’ motion, which calls for more to be done to show the impact of the cuts on low-paid workers.
Osborne will then turn his mind to his plans for the autumn statement. “Let’s wait and see where we are after the votes,” one government source said of the thinking in the Treasury about whether a change of tack was under way.
Molly Meacher, who had planned to table a fatal motion in the Lords to kill the tax credit cuts, accused Osborne of resorting to unspeakable “bullying tactics” to frighten peers.
Lady Meacher, who is now tabling a milder amendment, said Osborne had threatened to close down the upper house and to flood it with 100 extra Tory peers.
Meacher told The Week in Westminster on BBC Radio 4: “There has been enormous pressure coming from the Treasury and the chancellor of the exchequer upon peers. The weight on me has been unspeakable really. I think it’s bullying tactics.”
Asked what the threats were, she said: “Well, that he will close the House of Lords, that he will create 100 new Conservative peers. I’ve no idea [how] and I don’t believe that he can do that, but I’m just saying threats.”
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