While the Tories are still thinking about how to solve their tax credits quandary, the Resolution Foundation has come up with a simple solution: the cuts need to be reversed. In a new report out today, the think tank says any of the proposals for ‘lessening the impact of families during the transition’ (in the words of George Osborne) — such as tax cuts, childcare support, raising the minimum wage, gradually introducing the reforms and new measures to protect existing claimants – are still going to hit low-income families hard and the only way of helping them is to reverse the most punitive elements of cuts.
Instead, the Resolution Foundation suggests five ways to raise the funds so the cuts don’t need to happen. None of them are particularly appealing for the government:
- Increasing the Personal Allowance in line with inflation: instead of moving it towards £12,500. This would raise £4.9 billion by 2020.
- Increasing the Basic Rate Limit for income tax to rise in line with inflation: rather than accelerating it so that the higher rate threshold reaches £50,000. This would save £1.3 billion by 2020.
- Reversing the increase in the inheritance tax threshold and cuts to corporation tax: this would save £3.4 billion by 2020.
- Clawing back the over-indexation above earnings of the State Pension from the last parliament. This would be done by limiting pension rises in this parliament and would save approximately £6 billion.
- Returning spending on tax reliefs to 2010 levels by 2020 – which would reduce the UK’s £100 billion spending on ~1,000 different reliefs. This would save around £10 billion.
According to David Finch, a senior economic analyst at the Resolution Foundation, these proposals are the only realistic options for the Chancellor:
‘His options come down to pushing ahead with the reforms while trying and failing to compensate those losing out at significant expense, protecting current claimants at the price of much lower savings and creating perverse incentives, or finding the money to reverse at least the most damaging of the cuts.
‘Many proposals have been suggested to soften the impact of the changes – from further tax cuts, to a phasing-in of the reforms – but none of them make much of an imprint into the scale of losses being imposed on low income working families.’
It’s unlikely the Chancellor will be following up on any of these proposals. Aside from the financials, it would be even more humiliating politically for the government if they decided to scrap the cuts instead of offering some form of mitigation. We’ll find out on 25 November what proposals Osborne is bringing forward in the Autumn Statement, but a full reversal of the cuts does not seem feasible at this stage.
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