Tax credits cut will have saved £15bn, Treasury claims

20 Oct 15

The Treasury has defended controversial proposals to further cut spending on tax credits, saying reforms introduced since 2010 are projected to save £15bn by 2016/17.

Concern over the impact of the changes has been mounting, with a range of analysts and campaigners warning that they will hit the incomes of poorer working households too hard and too fast.

Issuing an analysis of savings to the tax credit bill today, the Treasury said that, prior to the reforms made in the 2010 Emergency Budget, spending on tax credits was forecast to be £35.7bn in 2014/15, up from £29.1bn in 2010/11 – an increase of £6.6bn.

The 2010 Budget moved the annual indexation for tax credits from the Retail Prices Index measure of inflation to the lower Consumer Prices Index and ended support for those earning £40,000 a year or more.
This reduced spending in 2014/15 to £29.7bn, according to the Treasury.

Additional reforms were announced in this year’s summer Budget as part of efforts to save an extra £12bn in welfare spending by 2019/20.

Among the changes were a four-year freeze in tax credits, and a cut in the level of earnings at which tax credits start to be withdrawn, from £6,420 to £3,850, from next April.

Following these changes, the Office for Budget Responsibility has forecast that spending on tax credits will fall from £29.5bn this year to £25.3bn next year. Overall, the reforms will have removed £15bn from next year’s tax credit bill.

The figures were published ahead of a Labour debate on tax credits today. Shadow work and pensions secretary Owen Smith and shadow chief secretary to the Treasury Seema Malhotra called on MPs from other parties to back a motion urging the government to reverse the plans.

“Since Parliament last debated this issue, a huge amount of new expert independent analysis has emerged, showing the true scale of the cuts,” they stated.

“As a result, we now know that from April, around three million working families will lose an average of £1,300 per year. While, one million single parents in work will be £1,000 a year worse off as a result of these cuts, and one and a half million married women will be £600 a year poorer. The changes will also result in 200,000 more children pushed in to poverty next year alone.”

Meanwhile, the work and pensions select committee today said it would hold an urgent session on the reforms next week.

This will consider the winners and losers from the changes, as well as the extent to which the national living wage will compensate individuals receiving lower tax credit payments. Institute for Fiscal Studies director Paul Johnson is one of the witnesses.

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