The changes to tax credits announced by the Chancellor in the budget and before Parliament today are neither economic sensible nor socially defensible.
It perfectly demonstrates the Tories warped economic logic. They plan to move public debt – which originated in the financial sector – off their books and onto the lowest paid and middle earners who simply cannot afford it. Not only will this damage my constituents and incentives to work but crucially, the wider economy.
To me this is about what type of economy and society we want to have. Unlike this government, I believe that economic common sense and social solidarity not only go hand in hand but are in combination the bedrock of a healthy and functioning society.
In his Budget in July, the Chancellor hailed a pay rise for working people but well he knew that his decision – to increase the taper so that tax credits reduce more sharply as income increases and reduce the income threshold – would mean the low-paid would not only see nothing of this pay rise, but in fact be confronted with a dramatic pay cut.
But those changes to tax credits are neither technical, nor minor. For those on low-pay, these measures will take individuals and families below the line needed to live their lives with any semblance of economic security or dignity:
A cleaner, who works for a local council outside London will be £1,649 a year worse off even after taking into account the rise in the minimum wage and the personal allowance rises since 2010. A teaching assistant with one child will be £1,769 per year worse off. And in my constituency, where 61% of families rely on tax credits to support them in work – it will have a devastating effect.
Where will those enormous savings on the backs of the lowest paid go? Straight to the Treasury who will save more than £4bn.
But you cannot have a healthy functioning economy if your fiscal policy is to transfer debt from the public purse onto the unemployed, the lowest paid and middle income individuals and families.
That’s because whether the Chancellor likes it or not, his policies don’t exist in a vacuum – if you cut the incomes of the lowest paid who cannot afford it then they are forced to borrow to pay for food and for rent. So that sustainable debt which started on the public books becomes unsecured and unaffordable debt on the household budget instead.
And the Chancellor should know where that leads.
He should know because the Governor of the Bank of England has spelt it out to him. Mark Carney warned over the summer that “household debt was one of the reasons why the recession was deep and the recovery so grudging”. He continued “and if enough people are highly indebted it can have big macroeconomic impacts so current lending standards can become irresponsible to reckless.”
And so we should be worried – household debt grew by 9% last year alone and has now risen to its highest level on record. 1.47 trillion pounds! Higher even than just before the crash in 2007 and families are now spending more on debt repayment than they are on food.
The Governor went on to offer some advice on this: “if wages are growing, people are more able to serve those debts”. Yet here we have a set of proposals before us which will give working people a massive pay cut. These are some of the same risk factors that led to the global credit crunch in 2007 – a low-paid insecure economy, burgeoning personal debt and a house price bubble colliding with an insecure financial system.
Those structural flaws remain, but we now have one very clear difference. We have a Chancellor who is exacerbating the problem by targeting those on low wages and middle incomes to clear public debt without regard for the problems it stores up for the future.
That’s what these changes to tax credits mean. The Tories may say it is necessary to deal with the public finances. But by taking working people below the level at which they can live a dignified life, by transferring debt from the public purse onto individuals who cannot afford it, they are not only making a society that is less fair and less equal but also an economy that is less stable and less sustainable.
That debt doesn’t just disappear into thin air – it is saddled onto those working long hours for very little – households whose average debt is now £9,520 and who are set to lose, as much as £3,000 from these changes.
That’s why the Labour Party are so fundamentally opposed to these measures because an inclusive and healthy economy cannot be built on the backs of the poor. It can only be built by supporting them. I opposed the changes to tax credits today not just because I want a more equal society, but because I want a more successful economy as well, and I’m afraid that this government’s plans will give us neither.
This article originally appeared on the Labour blog, LabourList which you can view here www.labourlist.org/2015/09/the-changes-to-tax-credits-are-neither-economically-sensible-nor-socially-defensible/