Tax Credits (Working Families)

Part of Opposition Day — [5th Allotted Day] – in the House of Commons at 5:15 pm on 7th July 2015.

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Photo of James Cartlidge James Cartlidge Conservative, South Suffolk 5:15 pm, 7th July 2015

I am delighted finally to have the opportunity to speak on this subject because I profoundly believe that tax credits are one of the greatest policy errors in the history of the welfare state. I say that not because of the Resolution Foundation, the International Monetary Fund or any theory; I say it because of my experience in the real world running a small business.

Let me share two key experiences with the House. The first was when I set up as a mortgage broker in 2004. We focused on the shared ownership sector, so most of our applicants were on lower and middle incomes. I was distinctly surprised when I found that people could take out mortgages based on tax credits. It its wisdom the Financial Services Authority decided that that was suitable, and I would be interested to know whether there are any Treasury figures on the amount of credit—both secured and unsecured—that was taken out on the basis of tax credits, using other people’s money to borrow other people’s money, and reinforcing the double dependency at the core of the tax credit system.

In my experience, the most serious issue with tax credits was when we started to recruit staff. In 2009, we embarked on our first round of pay rises after the great recession—Labour Members will be familiar with that—and I found it extraordinary when I received emails from staff declining those pay rises. Why did people not want a pay rise? One would expect anybody to want one—we all would; we want to get on in life. People rejected those pay rises because they would lose too much in tax credits, and that is the fundamental flaw in the tax credit system. I found that with various members of staff and parents at our school: people were in a dilemma about whether they should press on in life and try to earn more, even though they would lose money from tax credits and other benefits. I think that the tax credit policy is such a profound error because at a time of general prosperity we should not be seeking massively to expand the benefit system.

Let us consider our three core economic challenges. The first is the productivity puzzle, but it is no puzzle to me that people do not become more productive or work harder when there is no incentive for them to do so. Secondly, why is it a surprise that we have flat wage growth when there is such a disincentive for millions of workers to earn more? Thirdly, and most importantly, we have a real problem with social mobility, which is frozen. Everybody talks about that problem, but why would someone try to get on in life and be socially mobile if the massively expanded benefit system does not reward them for doing so? That is fundamental. To me, the essence of the tax credit system is that we are spending £30 billion a year to put a cap on the wages of British people and a ceiling on ambition and aspiration.