The debate about tax credits has been hugely frustrating to me. I am Labour, and very proud of the fact that we introduced tax credits when we were in Government- they’ve made an enormous difference in helping families, incentivising work, and tackling child poverty. I am all too aware of the enormous damage that George Osborne’s plans are going to do to families who desperately need them to get by at a time when the economy is still shaky, especially for the low-paid.
And it’s because I feel so strongly about it, that I’ve been disappointed by the debate. We should definitely be talking about the enormous hardship that households are going to face when they’re slashed- and we are. But we’re not talking about other seriously important reasons why we need tax credits.
The macroeconomic argument is simple. When households saw their incomes fall with the onset of the recession in 2008, tax credits were there to help them to see them through- they acted as automatic stabilisers. These are an important way of putting a brake on downturns, and making sure that consumption does not descend into an endless downward spiral. It’s why the bill for tax credits has increased so much, with the cost going from £16.4bn in 2006 to £31bn in 2014- because we had a recession in-between. With job losses in the steel industry-heavy North East of England, we should be talking about this more.
The microeconomic argument for them is to directly rebut the Government’s assertion that tax credits subsidising wages is wrong. It is true that tax credits can subsidise wages; because people get a top-up from the Government, they’re willing to work at wages lower than they would have otherwise. I think this has two problems- the first is that employers have considerable market power over employees at the low-wage end of the labour market, so many of those who work would have just worked for a lower wage. The second is that the evidence clearly shows that tax credits help increase employment by creating incentives to work that low-income wages would have failed to achieve by themselves. Employment has positive externalities outside of bringing home a wage; it helps create a work ethic that can be valuable, and is a necessary step before higher wages can be achieved. A positive externality means that leaving it to the free market means not enough people will be in work- and so a Labour devised tax credits- the Working Tax Credit and the Child Tax Credit- to assist those on low wages.
Tax credits aren’t always perfect, and sometimes can be a bit complicated, but it is worth remembering what we’re fighting for, and why it’s so important to our economic future to do it.