Tax Credits (Working Families)

Part of Opposition Day — [5th Allotted Day] – in the House of Commons at 6:09 pm on 7th July 2015.

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Photo of Huw Merriman Huw Merriman Conservative, Bexhill and Battle 6:09 pm, 7th July 2015

I, too, will take no interventions, following that example. I thank those Members who came in earlier, intervened and then walked straight out again, eating into the time available for my speech in the process.

In opposing the motion, I wish to explore three areas mentioned in—or, in fact, omitted from—the proposal. The first relates to in-work tax credits, what they were designed to achieve and what has happened in practice. “In-work tax credits need substantial reform to end the practice of employers paying low wages which are topped up by the state.” I was heartened to read that they were the those words of Alistair Darling, who introduced tax credits in the early 2000s. I am a firm believer that it is always wise to listen to those who pioneered a measure, as they are best placed to review whether it is meeting the objective it set out to achieve.

I submit that tax credits were not introduced to encourage large and profitable employers to keep wages low and to keep employees on the lowest rung of the ladder or risk losing a taxpayer-funded subsidy. Tax credits were introduced to incentivise employment, but with the view that as the employee showed his or her worth, their pay and prospects would increase and they would move beyond the tax credit threshold. However, I contend that tax credits have instead acted as a drag on real-time pay increases, as to increase pay would mean that the employer no longer received a top-up from the state. As such, they tend to keep employees in part-time work or on lower pay. With hindsight, it might have been better to put a time limit on the payment of tax credits, in the way this Government have done for the two-year national insurance holiday.

The second area relates to whether there is a better model for Government intervention in working pay. The motion talks about a belief

“that people should be given support and incentives to find employment and stay in employment”.

Indeed, with over 2 million new jobs having been created since the Government came to power in 2010, there is compelling evidence that the Government have supported people to find work. The motion should talk about the need to incentivise employers and employees to move up through the pay scales, which will boost spending in the economy overall and lead to increased productivity. The Government have provided incentives by reducing the tax rates for 26 million workers. However, while the Government, and therefore the country, find the money to give employees more of their own money through lower taxes, we continue to pay employers for employing staff. It is not as if the Government have increased the tax burden on companies to compensate for the cost of tax credits, because corporation tax has been reduced from 28% in 2010 to 20% in 2015.

Assessing whether it is possible to phase out tax credits, with an expectation that employers will cover the pay differential to staff, will free up more money for essential public services, such as health and education, where funding would be better utilised by us as a whole. Under the alternative—stepping out of private pay provisions that should be set by employer and employee, and funded by the employer only—there is a case for the Government sharing the cost of this reduction with employers and employees, with some of the savings being recycled as further corporation tax and income tax reductions.

The third point is more of an omission. It relates to high earners. The motion

“urges the Chancellor to guarantee that any assistance in the July 2015 Budget is focused solely on people on middle and low incomes.”

I fear that is another attempt to try to segregate those on higher incomes from the policies affecting this country. It should be remembered that the top 3,000 earners pay more tax to the Exchequer than the lowest 9 million—a third of all workers. Many in this House would say that is eminently sensible and just. However, it is crucial for any Government to assess whether the tax rates applicable to higher earners make economic sense for the rest of us, and not merely to play politics by demonising those who do so much to keep our public services funded through their own risk-taking and endeavour. In the last financial year, the wealthiest were funding a greater share of Government spending than at any time in history, notwithstanding the reduction of income tax from 50p to 45p. The wealthy are now largely weaned off the state.

In conclusion, the Government have created a remarkable economic climate, with 2 million new jobs and a 40% reduction in out-of-work benefits. The challenge, as we hopefully move to a period of growth and rising pay and incomes, is to set the jobs market free, lift people above the tax credit threshold, and, in so doing, ask employers to contribute the full share of pay.